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STATE OF MICHIGAN INVESTMENT BOARD MEETING

September 10, 2020 State of Michigan Retirement System

Quarterly Investment Review

Rachael Eubanks, State Treasurer Prepared by Bureau of Investments Michigan Department of Treasury

STATE OF MICHIGAN INVESTMENT BOARD MEETING

SEPTEMBER 10, 2020 Agenda

9:30 a.m. Call to Order and Opening Remarks

Approval of the 6/11/20 SMIB Meeting Minutes

9:35 a.m. Guest Speaker: Henry McVey – KKR

10:00 a.m. Executive Summary & Performance for Periods Ending 6/30/20

10:10 a.m. Current Asset Allocation Review

Markets Review and Outlook

10:20 a.m. BOI Investment Staff Focus: Henry James

Review of Investment Reports • Domestic Equity – Receive and File• Private Equity – Receive and File• International Equity – Receive and File• Real & Opportunistic Return – Receive and File• Real Estate & Infrastructure – Receive and File• Fixed Income – Receive and File• Absolute Return – Receive and File• Defined Contribution – Receive and File

Basket Clause – Receive and File

11:00 a.m. Public Comment

Closing Remarks ~ Adjournment

2020 Meeting Schedule

Thursday, December 10, 2020

All meetings start at 9:30 a.m.

www.michigan.gov/treasury

http://www.michigan.gov/treasury

State of Michigan Retirement System

MINUTES State of Michigan Investment Board Meeting

September 10, 2020

Jon M. Braeutigam Chief Investment Officer Bureau of Investments

STATE OF MICHIGAN INVESTMENT BOARD June 11, 2020 Meeting Minutes

Board Members Present: Chairman – Treasurer Rachael Eubanks – via Microsoft Teams Ms. Dina Richard – via Microsoft Teams Mr. Reginald Sanders – via Microsoft Teams Mr. James Nicholson – via conference line Mr. Chris Kolb – via Microsoft Teams

Members of the Public and Bureau of Investments Staff Present – via Microsoft Teams Jon Braeutigam Greg Parker

Robert Brackenbury Jim Elkins

Karl Borgquist Phil Kovarkis

Steve Cummings Max Kotary Lori Barrett Daniel Quigley Todd Warstler

Tim McEnery Annette Russell Travis Haney

Jennifer YeungJack Behar

John Sullivan Janet Sudac

Peter Woodford Woodrow Tyler

Lan Chen Semone James Patrick Moraniec Ann Storberg

Many others were present by AT&T phone line.

Opening Remarks:Rachael Eubanks called the meeting to order at 9:30 am.

Approval of Minutes:Approval of the March SMIB Meeting Minutes – Motion to approve by Chris Kolb. Seconded: Reggie Sanders. The vote was unanimous to approve.

AGENDA

Asset Liability Analysis/Asset Allocation Discussion and Recommendation Guest Speakers from AON: Max Kotary, Tim McEnery, Steve Cummings, Phil Kovarkis, Head of Asset Liability Team and John Sullivan, Senior Member of Asset Liability Team.

Mr. Phil Kovarkis gave a high-level summary overview of the asset- liability study, as well as the executive summary, highlighting the conclusions of the study performed over the last few months, supporting the recommended asset allocation policy. All questions were answered by members of the AON team.

Action Item – Resolution Authorizing Asset Allocation Strategy Mr. Gregory Parker, Director of Investments – Public Markets, discussed the resolution authorizing the asset allocation strategy. Mr. Parker believes the timing is right for this change and that staffing is appropriate for accomplishing this new strategy. He further explained how the strategy would be achieved.

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____________________________________

Resolution 2020-2 Mr. Gregory Parker described the reasoning for the new targets and ranges within this new resolution. Motion to accept the resolution by Dina Richard. Second: Reggie Sanders. Roll call vote was taken.

Action Item: Resolution 2020-2 – Resolution authorizing new asset allocation strategy.

Ayes: 5 Nays: 0 Motion Passed.

Executive Summary and Performance Jon Braeutigam, Chief Investment Officer for the Bureau of Investments, reviewed the executive summary performance section discussing performance returns and market conditions.

Asset Allocation Review, Markets Review and Outlook Mr. Gregory Parker explained the definition of the policy return as noted in the performance section and pointed out that SMRS’s returns are driven by those policy weight decisions, meaning by its strategic allocation policy weight.

He described the current economic forecast for the U.S. and the world, including the economic recession that began at the end of February 2020 due to Covid-19. He explained that no one was able to forecast this pandemic, and there is so much unknown regarding the virus that it is difficult to determine the length and severity of the economic downturn.

Review of Investment Reports and Basket Clause – Received and Filed

Public Comment: Treasurer Eubanks asked that any attendees wishing to address the Board speak out. Public comment was made by Eileen O’Grady with the Private Equity Stakeholder Project. She presented an update on the firm Leonard Green & Partners, which owns a hospital chain through its fund Green Equity Investors V, L.P., in which the SMRS is a limited partner investor. Ms. O’Grady addressed the board regarding her group’s concerns with this hospital chain.

AdjournmentTreasurer Eubanks acknowledged staff, noting their high-level passion for the job and adjourned the meeting at 10:55 am. Motion to adjourn by Chris Kolb. Seconded: Dina Richard. The vote was unanimous to adjourn.

Approved:

Rachael Eubanks, Chairman

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EXECUTIVE SUMMARY State of Michigan Investment Board Meeting

September 10, 2020

Gregory J. Parker, CFA

Director of Investments – Public Markets Director of Asset Allocation

Bureau of Investments

EXECUTIVE SUMMARY June 30, 2020

Performance Great peer comparison.

MPSERS Plan (06/30/20) 1-Year 3-Years 5-Years 7-Years 10-Years Annualized Returns 0.1% 6.6% 6.8% 8.4% 9.4% Policy Returns 3.1% 7.1% 7.6% 8.7% 10.1% Peer Median Returns* 2.1% 5.9% 6.2% 7.5% 8.5%

*State Street Universe greater than $10 billion. • Over the past three, five, seven, and ten years, the returns are significantly higher than peer

median returns. The peers are defined as the State Street Universe of public pension plans greater than $10 billion. Notably, the standard deviation of the monthly returns was in the lowest quartile for the longer time horizons.

• Over a very long horizon, since 1979, the annualized rate of return on the plan assets has been approximately 9.2%.

• Compounding at higher than peer returns can add significant value. For example, based on

the $45.1 billion June 2010 market value, a ten-year annualized return of 9.4% compared to the 8.5% peer median return would add about $8.8 billion in excess value.

• The returns lagged the policy benchmark over the past 1-year as the public markets returns

rebounded sharply in the June 2020 quarter.

Asset Allocation A low return environment. • Given the low rates of return available in the capital markets for safe assets, and in order to

earn the actuarial rate of return, additional risks (primarily equity risk) must be assumed. At the end of June 2020, the equity risk (beta) is approximately 0.37 which is one of the lowest measurements in three decades, and it is lower than peer median at approximately 0.6.

• Liquidity is another fundamental risk assumed and it is managed through asset allocation. The plans have outstanding capital commitments to fund approximately $12.8 billion in illiquid assets, primarily in private equity. In the June 2020 quarter, $255 million of new commitments were made.

• The combined systems paid out approximately $2.1 billion net of contributions over the past twelve months ending in June 2020. Over the past year, real return & opportunistic was a net purchaser of $1.0 billion and private equity approximately $606 million. Over the past year, the allocation to domestic equity was reduced by $1.95 billion, long-term fixed income by $700 million, real estate by $520 million, international equity by $250 million, and absolute return by $50 million. The allocation to short-term cash decreased by approximately $284 million.

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Investment Update

Highlighting the quarter.

($ Millions)

NEW COMMITMENTS

April 1, 2020 – June 30, 2020

Asset class Fund Name / (Managed By) Commitment

Private Equity $112.3

75.0

CVC Capital Partners VIII, L.P. (CVC Capital Partners VIII Limited)Silver Lake Partners VI, L.P. (Silver Lake Management Company VI, LLC) Meritech Capital Partners VII, L.P. (Meritech Capital Associates VII, LLC) 42.5 Renaissance Venture Capital Fund IV, L.P. (Renaissance Venture Capital Fund IV GP, LLC) 25.0

Real Estate and Infrastructure Division No new commitments 0.0

Real & Opportunistic Division No new commitments 0.0

Absolute Return Division No new commitments 0.0

TOTAL $254.8

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PERFORMANCE State of Michigan Investment Board Meeting

September 10, 2020


Bureau of Investments Mission Statement

The Bureau of Investments continually strives to provide quality

investment management services, broad professional expertise, and

independent advice to the State of Michigan Investment Board

as fiduciary of the State of Michigan Retirement System, and

independent of the Board, to the State Treasurer for various Michigan

trust funds and the State’s common cash, for which the State Treasurer

is the fiduciary.

SMRS Goals Maintain sufficient liquidity to pay benefits.

Meet or exceed the actuarial assumption over the long term.

Perform in the top half of the public plan universe over the long term.

Diversify assets to reduce risk.

Exceed individual asset class benchmarks over the long term.

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MPSERS PENSION Time-Weighted Rates of Return Periods Ending June 30, 2020

% of Ten Seven Five Three One Current Portfolio Years 1 Years 1 Years 1 Years 1 Year Quarter 6/30/20 Rate Rank Rate Rank Rate Rank Rate Rank Rate Rank Rate Rank

2

TOTAL PLAN 100.0 9.4 23 8.4 16 6.8 32 6.6 36 0.1 83 3.1 95 Median - Greater than $10 Billion 2

MPSERS Total Plan Policy

DOMESTIC EQUITIES 21.0

8.5

10.1

13.3 32

7.5

25

6.2

27

5.9

31

2.1

65

7.24.8

20.5 39

8.7 7.6 7.1 3.1

11.4 9.5 9.7 2.0 Median 2

S&P 1500 Index

PRIVATE EQUITY AND VENTURE CAPITAL 19.1

12.1 13.8

13.0 9

9.0

7

7.4

7

7.5

10

3.6

39

19.520.8

-8.1 92

11.7 10.2 9.9 6.1

12.2 10.1 10.7 -0.2 Median 2

Private Equity and VC Benchmark 3

INTERNATIONAL EQUITIES 15.9

9.3 13.8

6.1 57

8.2

38

6.2

48

5.2

50

-2.2

46

-4.6-19.0

16.1 74

12.9 9.9 8.3 -4.2

4.9 3.1 1.8 -3.4 Median 2

International Blended Benchmark 4

FIXED INCOME 12.7

6.1 5.0

4.4 63

4.3 3.8

4.4 46

2.9 2.3

4.6 52

1.7 1.1

4.5 62

-3.5 -4.8

3.7 86

17.316.1

3.2 76 Median 2

Barclays Aggregate

REAL RETURN AND OPPORTUNISTIC 12.3

4.7 3.8

9.6

4.2 4.0

10.7

4.6 4.3

8.5

4.8 5.3

8.8

7.4 8.7

-0.1

4.12.9

-5.2 50% (CPI +500 bps) + 50% (6.8% actuarial rate)

REAL ESTATE & INFRASTRUCTURE 8.7

7.2

10.1 65

7.0

9.4 48

7.0

7.3 54

6.8

5.5 71

5.9

-2.3 93

1.3

-6.0 97 Median 2

NCREIF - Property Blended Index 5

NCREIF Open Fund Index Net

ABSOLUTE RETURN 5.8

10.5 8.3 9.8

4.3

9.3 6.9 8.1

3.7

7.3 5.4 6.4

2.4

5.8 4.1 4.7

3.1

2.7 1.4 1.3

0.0

0.0-1.3-1.8

-3.9 HFRI FOF Cons 1 month lagged

CASH EQUIVALENTS 4.7

2.3

1.0

2.0

1.2

1.0

1.6

1.3

2.1

-1.5

1.9

-3.3

0.2 1 Month T-Bill 0.6 0.8 1.1 1.6 1.4 0.0

1 Annualized Returns and Percentile Rank. 2 Comparison universe is the State Street Universe comprised of Public Funds greater than $10 billion on the total plan level and greater than $1 billion for asset classes. 3 SP500 + 300 bps with a 3 month lag. 4 International blended benchmark is S&P Developed BMI-EPAC 50/50 prior to 1/1/10. S&P Developed BMI-EPAC 75 USD / 25 Local, 1/1/10 to 9/30/10. MSCI ACWI ex USA Gross 10/1/10 to present. 5 NCREIF - Property Blended Index is NPI minus 130 bps. Source: State Street Analytics; the NCREIF - NPI (Property Index) source is NCREIF; the S&P BMI-EPAC Index source is S&P.

Cumulative and Consecutive Total Fund Returns

3

MPSERS Cumulative For Years Ending 6/30/20

1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year

MPSERS 0.1 3.9 6.6 8.1 6.8 6.7 8.4 8.9 8.1 9.4

Public Plan - Median (> $10 billion)* 2.1 4.2 5.9 7.4 6.2 6.0 7.5 7.8 7.4 8.5

Rank 83 53 36 27 32 16 16 22 23 23

bp Difference - Median -207 -22 67 69 57 68 88 102 70 90

Consecutive For Years Ending

06/20 06/19 06/18 06/17 06/14 06/13 06/12 06/11

MPSERS 0.1 8.0 12.0 12.9 19.1 12.2 2.6 21.7

Public Plan - Median (> $10 billion)* 2.1 6.6 9.1 13.0 16.9 12.5 1.8 22.0

Rank 83 20 4 58 14 57 32 56

bp Difference - Median -207 134 290 -12 222 -29 80 -21

06/16 06/15

1.5 6.2

1.4 3.8

45 5

12 240

MSERS Cumulative For Years Ending 6/30/2020

1 Year 2 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year

MSERS 0.1 3.9 8.1 6.8 6.7 8.4 8.8 8.1 9.4

Public Plan - Median (> $1 billion)* 2.2 4.0 7.4 6.0 5.6 7.2 7.5 7.0 8.1

Rank 80 53 22 24 15 16 19 20 23

bp Difference - Median -209 -4 75 73 110 122 130 107 133

3 Year

6.6

5.6

30

96


06/19 06/18 06/17 06/16 06/15 06/14 06/13 06/12 06/11

MSERS 7.9 12.0 13.0 1.5 6.2 19.1 12.2 2.4 21.7


Rank 17 4 49 43 4 19 56 34 54

bp Difference - Median 149 333 3 24 318 216 -30 134 -16

06/20

0.1

2.2

80

-209

*State Street Public Funds Universe

Cumulative and Consecutive Total Fund Returns

4

MSPRS Cumulative For Years Ending 6/30/20

1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year

MSPRS 0.1 3.9 6.6 8.1 6.8 6.7 8.4 8.8 8.1 9.4

Public Plan - Median (> $1 billion)* 2.2 4.0 5.6 7.4 6.0 5.6 7.2 7.5 7.0 8.1

Rank 79 54 30 23 25 19 17 19 21 23

bp Difference - Median -208 -5 96 75 73 109 120 127 105 132


06/20 06/19 06/18 06/17 06/14 06/13 06/12 06/11

MSPRS 0.1 7.9 12.0 13.0 19.0 12.1 2.5 21.8

Public Plan - Median (> $1 billion)* 2.2 6.5 8.7 13.0 16.9 12.5 1.1 21.9

Rank 79 17 4 49 19 58 33 52

bp Difference - Median -208 147 334 2 208 -41 138 -9

06/16 06/15

1.5 6.2

1.3 3.0

43 4

23 316

MJRS Cumulative For Years Ending 6/30/20

1 Year 2 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year

MJRS 0.1 3.9 8.1 6.8 6.7 8.3 8.7 8.0 9.4


Rank 79 52 21 24 15 19 20 23 24

bp Difference - Median -207 -4 77 74 110 111 120 98 129

3 Year

6.6

5.6

29

97


06/19 06/18 06/17 06/16 06/15 06/14 06/13 06/12 06/11

MJRS 7.9 12.0 13.0 1.5 6.2 18.2 12.2 2.4 22.1


Rank 17 4 47 43 4 29 54 34 48

bp Difference - Median 148 334 9 21 315 128 -25 128 26

06/20

0.1

2.2

79

-207

*State Street Public Funds Universe


ASSET ALLOCATION REVIEW State of Michigan Investment Board Meeting

September 10, 2020


STATE OF MICHIGAN RETIREMENT SYSTEM PROFILE - JUNE 2020

1

Asset Allocation ~ 6/30/20 Absolute Short Term

Return 4.6%

5.8% Real Estate & Domestic Equity Infrastructure 20.9%

8.7%

Real Return & Opportunistic

Private Equity 12.3% 19.1%

Fixed Income 12.7% International Equity

15.9%

Market Value* (Billions of Dollars)

$77.7 $80 $72.2 $69.9 $69.5

$70 $60.7 $62.2 $60.1

$60 $56.6 $49.7 $51.0

$48.1 $50

$40

$30

$20

$10

$0

Asset Allocation By Market Value(In Millions)

Investment Strategies 6/30/2020 6/30/2019 Domestic Equity $15,080 20.9% $16,636 22.3%

Private Equity 13,779 19.1% 13,380 18.0% International Equity 11,458 15.9% 12,131 16.3% Fixed Income 9,163 12.7% 9,459 12.7% Real Return & Opportunistic 8,884 12.3% 7,951 10.7% Real Estate & Infrastructure 6,295 8.7% 6,994 9.4%

Absolute Return 4,179 5.8% 4,260 5.7% Short Term*** 3,363 4.6% 3,648 4.9%

TOTAL $72,201 100.0% $74,459 100.0%

Market Value By Plan ~ 6/30/20 (in Millions)

Pension Plan OPEB** CombinedMkt. Value Mkt. Value Mkt. Value %

MPSERS $48,525 $7,160 $55,685 77.1% MSERS - (closed) 11,484 3,106 14,590 20.2% MSPRS 1,431 242 1,673 2.3% MJRS - (closed) 244 9 253 0.4% TOTAL $61,684 $10,517 $72,201 100.0% MSERS includes the Military Pension Fund

Short Term Equivalents (in Billions) Short Term Strategy*** $3.4 Short Term in Other Inv. Strategies 1.2 TOTAL SHORT TERM $4.6 6.3% of Total Funds

18th Largest DB Public Pension Fund in the U.S.

Pensions & Investments survey - February 10, 2020 issue

*The combined net payout for the plans for FY 2018 was $1.7 billion with $22.0 billion paid out FY 2009 thru FY 2018 (Pension CAFRs). This represents the amount paid to beneficiaries in excess of employer and employee contributions. **OPEB - Other Post Employment Benefits

2

Sources and Uses of Cash July 2019 ~ June 2020

7/01/19 Short-Term Cash Balance: $ 3,649

6/30/20 Short-Term Cash Balance: 3,365

$ 284

$50

-$606

Absolute Return

Private Equity

Net Short-Term Cash Decrease: $1,942

$704 $520

$248

-$1,042

Fixed Real Return & Domestic Income Opportunistic Equity

-$2,100 International Real Estate & Equity Infrastructure

Net Benefit Payments

A negative number in an asset category indicates a use of cash, a positive number indicates a source of cash. Dollars in millions

Asset Allocation Targets

As of 6/30/20

MPSERS MSERS MSPRS MJRS SMRS

Asset Class 6/30/20 Target* 6/30/20 Target* 6/30/20 Target* 6/30/20 Target* Ranges

Domestic Equity 21.0% 25.0% 21.0% 25.0% 21.0% 25.0% 21.0% 25.0% 17% - 32%

Private Equity 19.1% 16.0% 19.0% 16.0% 19.0% 16.0% 19.1% 16.0% 13% - 25%

International Equity 15.9% 15.0% 15.9% 15.0% 15.9% 15.0% 15.8% 15.0% 12% - 22%

Real Return & Opportunistic

12.3% 12.5% 12.3% 12.5% 12.3% 12.5% 12.3% 12.5% 8% - 18%

Long Term Fixed Income

12.7% 10.5% 12.7% 10.5% 12.7% 10.5% 12.7% 10.5% 8% - 18%

Real Estate & Infrastructure

8.7% 10.0% 8.7% 10.0% 8.7% 10.0% 8.7% 10.0% 8% - 18%

Absolute Return 5.8% 9.0% 5.8% 9.0% 5.8% 9.0% 5.8% 9.0% 5% - 11%

Short Term Fixed Income

4.7% 2.0% 4.7% 2.0% 4.7% 2.0% 4.7% 2.0% 1% - 8%

TOTAL 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

*Complies with basket clause and international restrictions.

3


MARKETS REVIEW AND OUTLOOK State of Michigan Investment Board Meeting

September 10, 2020

Gregory J. Parker, CFA Director of Investments – Public Markets

Director of Asset Allocation Bureau of Investments

CAPITAL MARKETS

Return and Risk Assumptions, Benchmark and OutlookA starting point.

MPSERS Plan

Assumed Return*

(Arithmetic) Standard Deviation*

Trailing10-Year

(Benchmark**) Private Equity 11.0% 30.0% 13.8% International Equity 9.5% 21.4% 5.0% Real Ret/Opportunistic 8.1% 9.5% 7.2% Domestic Equity 7.4% 18.2% 13.8% Real Estate (Core) 7.4% 15.0% 8.3% Absolute Return 4.6% 9.0% 2.3% Long-Term Fixed Income 1.3% 4.0% 3.8% Short-Term 0.7% 1.5% 0.6%

* Aon Investment Consultants 2020 Long-Term Return/Risk Assumptions ** Investment Policy Statement; Annualized Returns

*** Actual investments may differ due to changing conditions and the availability of new information

Overview A market update.

Capital market assumptions used for determining strategic asset allocations are being reduced across the board, and especially for safer, publicly traded fixed income securities. This is the general opinion for most consultants, investment banks, and other market participants. The reason for this phenomenon is the low interest rate environment caused by the policies of the Federal Reserve (Fed) and other central banks, as well as the run-up in prices for most risk assets over the past several years.

The June 2020 quarter was one that could be characterized as a healing for the economy and risk markets in general. This was on the back of one of the most severe market dislocations across asset classes as well as some of the most awe-inspiring actions taken by the U.S. Federal Reserve and U.S. Treasury.

Corporations in the U.S. as well as globally have access to capital through the debt market. The June 2020 quarter saw record issuances globally as well as in the U.S., as both investment grade and high yield issuance was at a record high.

In many ways, the Covid-19 pandemic accelerated business trends that were already in place headed into the year 2020. Many economically disruptive companies are included in the NASDAQ 100 Index and the contrast of this index return compared to the broader S&P 1500 Composite return exemplifies this point.

Analyst EPS expectations for foreign companies are similar to their U.S. counterparts, if slightly less bearish. Analysts expect EPS to decline over the next twelve months in developed markets by -2.6% but expect slight growth in emerging markets of 0.75%.

Safe haven commodity assets such as gold have performed well recently. At the end of June 2020, the dollar price for an ounce of gold was at $1,800. This is 27% higher than the year prior.

1

U.S. Fixed Income The debt markets are open.

The March 2020 quarter witnessed one of the most severe market dislocations within the U.S. Fixed Income asset class as well as some of the most awe-inspiring actions taken by the U.S. Federal Reserve and U.S. Treasury.

To highlight a few of the policy responses: o The Fed will be lending as much as $5 Trillion, which is more than its entire

balance sheet before the crisis, as it’s part of the CARES act. o The Fed created new lending facilities targeting the corporate and municipal bond

markets and is able to extend loans directly to large and small companies as well as buy bond ETFs.

o The expanded policies also allow the Fed to buy corporate bonds from “fallen angels” that have been recently downgraded.

o These programs are on top of the usual liquidity facilities of lowering rates and providing currency swap lines to foreign central banks.

The responses to these policy actions had a calming effect on the markets. By the end of June 2020, the 10-year U.S. interest rate was 0.66% and the 2-year rate was at 0.15%. Spreads on investment-grade corporate debt were 1.4% which is 0.3% above average and high yield fixed income spreads were 6.3% which are 1.8% above long-term averages.

Corporations in the U.S. as well as globally have access to capital through the debt market. The June 2020 quarter saw record issuances globally as well as in the U.S., as both the investment grade and high yield issuance was at a record high.

Domestic EquityA bifurcated market.

The broad U.S. stock market return for the one year ending June 2020 was 6.1%. Incredibly, this level is approximately only -9% from the all-time high which was hit in February 2020.

Many domestic equity valuation metrics are above historical averages, and analysts expect that fundamentals will continue to deteriorate over the next twelve months. Consequently, the returns over the next cycle may not be as strong as the historical average of 11 – 12% year-over-year total returns. Fundamentally, however, the market’s returns on equity continue to be historically higher than average and some of the largest companies in the market today are less cyclical (economically sensitive) than past market leaders. These facts lend support to the argument that higher valuations are justified, and therefore the market could perhaps continue to deliver historical average rates of return in the future.

In many ways, the Covid-19 pandemic accelerated business trends that were already in place headed into the year 2020. Many economically disruptive companies are included in the NASDAQ 100 Index and the contrast of this index return compared to the broader S&P 1500 Composite return exemplifies this point. The one-year return for the NASDAQ 100 ending June 2020 was 33.8%, out-returning the S&P 1500 by 27.7%. Analysts expect the S&P 500 EPS to fall another 3% in the next twelve months, however, they estimate that the NASDAQ 100 EPS will grow 8% over the same time period.

2

International EquityAre fundamentals priced in?

International equities underperformed domestic equities over the year ending June 2020 by -10.5%. Over the past three, five, seven, and ten years, the international market index, MSCI ACWI ex USA, underperformed the S&P 1500 index by -8.3%, -7.5%, -7.6%, and -8.3% annualized, respectively.

Within international equities, emerging market returns exceeded developed markets over the past one, three and five years by 1.9%, 0.9% and 0.7% annualized, respectively. However, over the past seven and ten years, emerging markets returns were -0.7% and -2.3% annualized less than developed markets.

From a factor perspective within international equity markets, both higher quality and momentum performed well over the past one and three years. International had a similar story as the U.S, where value as a factor lagged.

Based on a price-to-earnings valuation multiple, excluding non-earning companies, developed international markets trade at approximately a 17% discount to U.S. counterparts while emerging markets are at a 34% discount. Analyst EPS expectations for foreign companies are similar to their U.S. counterparts, if slightly less bearish. Analysts expect EPS to decline over the next twelve months in developed markets by -2.6% but expect slight growth in emerging markets of 0.75%.

Real Estate Comparing Public vs. Private Real Estate

Over the one year ending June 2020, the NAREIT index decreased by -6.5% including dividends, as the economic hit of the global pandemic began to take hold. Over the past ten years, publicly traded REITs have out-performed private real estate by 0.6%, annualized, but they are about three times more volatile.

Dividend yields on REITs at the end of June 2020 were estimated to be around 4.0% which is nearly 3.5% higher than the yield of the ten-year U.S. Treasury. Historically, REIT dividend yields have averaged only 1.2% higher than the ten-year U.S. Treasury and at these levels may be seen as relatively attractive.

Hedge FundsEstimating the asset class return.

Since its inception, the Absolute Return portfolio’s return has had a monthly beta of approximately 0.15 and annualized net alpha of 1%. The fund also has a low correlation to the Fixed Income benchmark, -0.1%, making it a good diversifier to equity and rates.

Based on an expected annualized equity market return of approximately 6.1%, should historical hedge fund betas and alphas continue, a 2.2% annualized net return seems like a reasonable assumed rate of return for hedge funds. This return is approximately 3-month U.S. Libor plus 150 basis points. However, it should also be noted that in the past after times of market dislocations, the realized alpha has been higher.

3

Commodities Safe havens on a roll.

Over the past ten years, commodities prices broadly have fallen, as measured by the Thomson Reuters CRB Commodity Index, down by roughly -14% from March 2010. Commodities broadly have strengthened in price since the April 2020 low.

The U.S. dollar experienced a bout of volatility in the month of March 2020 and has fallen in value -5.9% from the end of March to the end of July. As measured by the DXY index it was virtually unchanged for year-over-year and is near the midpoint of the past 5 year trading range versus a basket of currencies.

Safe haven commodity assets such as gold have performed well recently. At the end of June 2020, the dollar price for an ounce of gold was at $1,800. This is 27% higher than the year prior. Over the past decade, the precious metal has appreciated by more than 44%, this is in sharp contrast to the broad commodity market in general. Investors in gold believe that the significant increase in debt by the U.S. as well as other large economies provides a tail-wind for the supply constraint metal.

4

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Best Gov't Corp. Gov't Int'l Int'l Real Int'l Int'l Gov't Int'l U.S. Real Int'l U.S. U.S. Real U.S. Int'l Real U.S. Best Bonds Bonds Bonds Equity Equity Estate Equity Equity Bonds Equity Equity Estate Equity Equity Equity Estate Equity Equity Estate Equity

13.23% 10.40% 11.50% 40.82% 20.90% 20.06% 26.65% 16.65% 12.38% 41.44% 16.38% 14.26% 16.83% 32.80% 13.08% 13.32% 11.93% 27.19% 6.71% 30.90% Real Real Corp. U.S. Real Int'l Real Real Cash U.S. Real Gov't U.S. Int'l Real U.S. Real U.S. Infla- Int'l

Estate Estate Bonds Equity Estate Equity Estate Estate Equity Estate Bonds Equity Equity Estate Equity Estate Equity tion Equity

12.24% 7.28% 10.52% 29.58% 14.48% 16.62% 16.59% 15.84% 2.05% 27.24% 13.11% 9.02% 16.17% 15.29% 11.81% 1.01% 7.97% 21.13% 1.91% 22.13% Corp. Gov't Real Hedge U.S. U.S. U.S. Gov't Infla- Corp. Int'l Corp. Real Real Corp. Gov't Corp. Real Cash Corp. Bonds Bonds Estate Funds Equity Equity Equity Bonds tion Bonds Equity Bonds Estate Estate Bonds Bonds Bonds Estate Bonds

9.40% 7.24% 6.74% 9.01% 11.78% 5.65% 15.34% 8.67% 0.10% 16.05% 11.15% 8.35% 10.54% 10.99% 7.53% 0.86% 5.63% 6.96% 1.88% 14.54% Cash Cash Hedge Real Hedge Hedge Hedge Hedge Corp. Hedge Corp. Infla- Corp. Hedge Gov't Infla- Int'l Corp. Gov't Gov't

Funds Estate Funds Funds Funds Funds Bonds Funds Bonds tion Bonds Funds Bonds tion Equity Bonds Bonds Bonds

6.16% 4.43% 3.57% 8.99% 5.83% 5.13% 9.21% 7.68% -3.07% 9.65% 8.46% 2.96% 9.37% 7.70% 4.92% 0.66% 4.50% 6.42% 0.88% 6.83% Hedge Hedge Infla- Corp. Corp. Infla- Cash U.S. Real Infla- Gov't U.S. Hedge Infla- Hedge Hedge Infla- Hedge Hedge Real Funds Funds tion Bonds Bonds tion Equity Estate tion Bonds Equity Funds tion Funds Funds tion Funds Funds Estate

5.77% 3.11% 2.39% 7.69% 5.25% 3.42% 4.81% 5.47% -6.46% 2.72% 5.52% 1.75% 4.22% 1.49% 3.14% 0.37% 2.09% 3.88% -1.05% 6.42% Infla- Infla- Cash Gov't Gov't Cash Corp. Corp. Hedge Cash Hedge Cash Gov't Cash Infla- Cash Hedge Gov't Corp. Hedge tion tion Bonds Bonds Bonds Bonds Funds Funds Bonds tion Funds Bonds Bonds Funds

3.39% 1.55% 1.79% 2.36% 3.48% 3.06% 4.27% 5.10% -19.86% 0.19% 5.07% 0.10% 2.02% 0.07% 0.68% 0.01% 1.89% 2.30% -2.51% 6.35% U.S. U.S. Int'l Infla- Infla- Gov't Gov't Cash U.S. Gov't Infla- Hedge Infla- Corp. Cash Corp. Gov't Infla- U.S. Infla-

Equity Equity Equity tion tion Bonds Bonds Equity Bonds tion Funds tion Bonds Bonds Bonds tion Equity tion

-6.98% -10.64% -14.95% 1.88% 3.25% 2.65% 3.46% 5.03% -36.72% -2.19% 1.50% -3.55% 1.70% -2.01% 0.04% -0.77% 1.05% 2.12% -4.96% 2.29% Int'l Int'l U.S. Cash Cash Corp. Infla- Infla- Int'l Real Cash Int'l Cash Gov't Int'l Int'l Cash Cash Int'l Cash

Equity Equity Equity Bonds tion tion Equity Estate Equity Bonds Equity Equity Equity

Worst -15.31% -19.74% -21.30% 1.16% 1.33% 1.95% 2.55% 4.06% -45.52% -16.86% 0.13% -13.71% 0.11% -2.60% -3.87% -5.67% 0.27% 0.84% -14.20% 2.28% Worst

Annualized Returns 2000 - 2019 Cash Infl. Hedge Int'l. Gov't. Corp. US Eq. R.E.

Return 1.77% 2.15% 3.16% 4.27% 4.59% 6.06% 6.44% 8.73% Return Risk 0.96% 1.33% 4.79% 18.66% 4.44% 5.22% 15.93% 4.55% Risk

- Hedge Funds are represented by the HFRI FOF Conservative Index - U.S. Equity is represented by the S&P 1500 Index - Inflation is represented by the U.S. Consumer Price Index (SA) - Real Estate is represented by the NCREIF National Property Index - International Equity is represented by the MSCI - AC World EX-USA Index - Corporate Bonds are represented by the BBG Barclays - U.S. Corp. Inv. Gd. Index - Cash is represented by 30-day T-Bills - Government Bonds are represented by the BBG Barclays - U.S. Government Index

Annual Total Returns of Key Asset Classes 2000 - 2019

5


DOMESTIC EQUITY REVIEW State of Michigan Investment Board Meeting

September 10, 2020

Jack A. Behar, CFA Senior Investment Manager

Domestic Equity Division

EXECUTIVE SUMMARY

Performance

MPSERS Plan (6/30/20) 1-Year 3-Years 5-Years 7-Years 10-Years

Annualized Returns 2.0% 9.7% 9.5% 11.4% 13.3%

S&P 1500 6.1% 9.9% 10.2% 11.7% 13.8%

Peer Median Return 3.6% 7.5% 7.4% 9.0% 12.1%

Percentile Rank vs. Peers * 65 31 27 25 32 *State Street Universe greater than $1 billion

In the quarter ended June 30, 2020, Total Domestic Equity outperformed its peer group over three, five, seven and ten years while underperforming the S&P 1500. During the past year, performance was 410 basis points (bps) behind the benchmark net of fees, with incurred tracking error of 3.4%.

While the division outperformed the S&P 1500 in both January and February and has resumed its positive performance trajectory since markets were stabilized in April, both returns and risk metrics were impacted by the Black Swan impact of Covid-19 in March.

The division’s value orientation, investments in the financial sector and exposure to smaller companies have proved challenging in 2020, particularly during the heat of the crisis in the financial markets.

Moreover, since the end of March, markets have become exceptionally bifurcated, with technology companies that are less sensitive to or even benefitting from the current “work from home” environment, skyrocketing in value to arguably inappropriate levels, while many other companies remain priced for a recessionary environment.

This dynamic has led to one of the widest valuation dispersions in history, similar to the technology bubble of the late 1990’s. While such dispersions can make it difficult for active managers to outperform, it can also lay the foundation for future excess returns if and when such relationships normalize.

Asset Class Goal

To provide the SMRS with long-term domestic equity market returns or better, by investing in a diversified and attractively valued portfolio of companies at an index fund-like cost.

1

Strategy Update

The Domestic Equity division is in the process of implementing the Barra risk model, which will enable it to have an improved ability to measure its sensitivity to certain “buckets” of companies, such as those with price momentum (momentum stocks), discounted prices (value stocks) and high returns on invested capital (quality stocks).

The goal is to have a balance of such companies in the portfolio, along with beta exposure when we believe markets are attractive, in order to drive consistent performance throughout the economic cycle.

The division will be launching two new internal funds in September relating to this objective.

The first is a value, quality and momentum index fund, which will be comprised of equal exposure to each “factor bucket” and will be managed by Ted Kulinski, who heads our index fund strategies.

The second will be a momentum-based strategy, underpinned by deep analysis into companies that are engaged in disruptive innovation and address large underlying markets. This fund will be managed by Henry James, our internal technology specialist, who has decades of experience and an established track record of identifying such companies early in their lifespans.

Market Environment and Outlook

At ~22x forward earnings, equity markets trade at a premium to both their historical average of 15.7x and their twenty-five-year historical average of 18x.

Meanwhile treasury bonds trade at 150x earnings versus their historical average of 21x.

Factoring this in, alongside near zero percent returns on cash, the enormous influx of money injected into the financial system from the Federal Reserve, and the continued availability of many attractively valued companies, stocks remain a reasonable alternative to bonds and bond-like asset classes.

As of June 30, the market was paying out 1.8% of its earnings in dividends and reducing shares outstanding by 2.5% through share buybacks, for a 4.3% total shareholder yield. The market was also reinvesting back into growth at a rate of 1.8%, thus generating a roughly 6.1% investment return (shareholder yield of 4.3% + reinvestment rate of 1.8%).

Given current recessionary conditions, growth, buybacks and dividends will all be negatively affected this year and possibly into next year, but the market should generate long-term investment returns in the 7-8% range looking ahead to 2021 and beyond as profitability improves and reinvestment picks up.

Such returns compare favorably to the 30-year U.S. Treasury at 1.4%, and unfavorably to the historical compound annual return for the S&P 500 from 1928-2018 of 9.5%.

2

SMRS Domestic Equity Strategies

6/30/20

Markets Amount Total % of Total

Internal Indexed ($ in Millions)

Indexed Portfolios

Total Indexed

$7,500

$7,500 49.7%

Internal Active

Active Portfolios

Total Internal Active

$3,821

$3,821 25.4%

External Active

Los Angeles Capital Mellon Capital ARK Investments Seizert Capital Partners Clarkston Capital Partners

Attucks Asset Management Bivium Capital Ancora

Total External Active

$1,18898051641538410710168

$3,759 24.9%

Total Domestic Equity $15,080 100.0%

3

SMRS Domestic Equity By Sector

6/30/20

Information Technology

26.3%

Health Care 14.8%

Financials 13.4%

Communication Services

10.2%

Consumer Discretionary

9.3%

Industrials 7.5%

Consumer Staples

5.8%

Utilities 4.5%

RE 3.4%

Materials 2.6%

Energy2.2%

Market Value in Millions 6/30/20

Assets Percent Benchmark Difference

Information Technology Health Care Financials Communication Services Consumer Discretionary Industrials Consumer Staples Utilities Real Estate Materials Energy

$3,958 2,236 2,017 1,541 1,404 1,137

879 684 512 385 327

26.3% 14.8% 13.4% 10.2% 9.3% 7.5% 5.8% 4.5% 3.4% 2.6% 2.2%

26.5% 14.4% 10.5% 10.1% 11.1% 8.7% 6.7% 3.1% 3.4% 2.8% 2.7%

-0.2% 0.4% 2.9% 0.1%

-1.8% -1.2% -0.9% 1.4% 0.0%

-0.2% -0.5%

Total $15,080 100.0% 100.0%

4

Benchmark: S&P 1500

SMRS Domestic Equities Composite

6/30/20

Date: 6/30/20 3/31/20 12/31/19 9/30/19

Assets ($ in Millions): $15,080 $12,954 $17,645 $16,789 Number of Securities: 1,304 1,316 1,354 1,316 Active Share: 31% 35% 41% 43%

Description: The Domestic Equities Composite combines both the SMRS’ Actively Managed Composite and its index funds.

S&P 1500 Characteristics SMRS S&P 1500 Value Market Capitalization ($ in Billions) $309.5 $375.4 $112.7 Normalized P/E 19.2 20.8 15.8 P/E Upside to S&P 1500 8.3% 0.0 31.7% Price/Book 3.2 3.3 1.9 Return on Equity 15.6% 16.0% 12.0%

Risk Metrics Beta 1.04 1.00 0.99 Tracking Error 2.7% 0.0% 4.8%

Projected Returns Dividend Yield 2.0% 1.8% 2.8% Buyback Yield 2.6% 2.5% 2.9% Reinvestment Rate 2.0% 1.8% 1.2% Projected Investment Return 6.6% 6.1% 6.9%

TOP TEN EXPOSURES – Domestic Equities vs S&P 1500 6/30/20

Domestic Equity Portfolio S&P 1500

Portfolio FY1 Market FY1 Company Name SPDR S&P 500 ETF Trust Microsoft Corp. SPDR Port. LT Treasury ETF

Weight 7.1% 4.4% 4.3%

P/E25.0 37.7 58.1

Company Name Microsoft Corp. Apple, Inc. Amazon.com, Inc.

Weight 5.6% 5.3% 4.5%

P/E37.7 30.6

162.6 Apple, Inc. Amazon.com, Inc. Facebook, Inc. Class ANextEra Energy, Inc.

4.3% 3.1% 1.8% 1.5%

30.6 162.6

33.6 27.3

Facebook, Inc. Class AAlphabet, Inc., Class AAlphabet, Inc., Class C Johnson & Johnson

2.0% 1.6% 1.5% 1.3%

33.6 36.4 36.2 18.6

Alphabet, Inc., Class A 1.3% 36.4 Berkshire Hathaway, Inc. B 1.3% 19.4 Visa, Inc. 1.2% 39.4 Visa, Inc. 1.2% 39.4 Berkshire Hathaway, Inc. B 1.0% 19.4 Procter and Gamble Co. 1.1% 24.5 TOTAL 30.0% 34.8 TOTAL 25.4% 36.0

5

6/30/20

SMRS Active Equity By Sector

Consumer Staples

5.0%

Utilities 5.9%

RE 3.4%

Materials 2.0%

Energy1.7%


26.0%

Industrials 6.9%


7.1%


10.0%

Financials 16.5%

Health Care 15.5%



Information Technology Financials Health Care Communication Services Consumer Discretionary Industrials Utilities Consumer Staples Real Estate Materials Energy

$1,971 $1,252 $1,173

$760 $534 $527 $450 $380 $256 $150 $128

26.0% 16.5% 15.5% 10.0% 7.1% 6.9% 5.9% 5.0% 3.4% 2.0% 1.7%

26.5% 10.5% 14.4% 10.1% 11.1% 8.7% 3.1% 6.7% 3.4% 2.8% 2.7%

-0.5% 6.0% 1.1%

-0.1% -4.0% -1.8% 2.8%

-1.7% 0.0%

-0.8% -1.0%

Total $7,581 100.0% 100.0%

6

Benchmark: S&P 1500

SMRS Actively Managed Composite

6/30/20

Date: 6/30/20 3/31/20 12/31/19 9/30/19

Assets ($ in Millions): $7,581 $7,367 $10,232 $9,969

Number of Securities: 873 957 1,069 1,052

Active Share: 61% 61% 70% 72%

Description: The Actively Managed Composite is designed to add consistent alpha by investing in managers with value-added, but diverse strategies. While the expectation is that most will outperform over time, the composite is designed such that they do so during differing parts of the business cycle.

S&P 1500 Characteristics SMRS S&P 1500 Value Market Capitalization ($ in Billions) $238.5 $375.4 $112.7 Normalized P/E P/E upside to S&P 1500 Price/Book Return on Equity

18.8 10.6% 2.0x

17.5%

20.8 0.0 3.3x

16.0%

15.8 31.7% 1.9x

12.0%

Risk Metrics Beta 1.01 1.00 0.99 Tracking Error 5.4% 0.0% 4.8%

Projected Returns Dividend Yield 2.2% 1.8% 2.8% Buyback Yield 2.7% 2.5% 2.9% Reinvestment Rate 2.3% 1.8% 1.2% Projected Investment Return 7.2% 6.1% 6.9%

TOP TEN EXPOSURES – Actively Managed Equities vs S&P 15006/30/20

Actively Managed Equity Portfolio S&P 1500

Portfolio FY1 Market FY1 Company Name SPDR S&P 500 ETF Trust SPDR Port. LT Treasury ETF Apple, Inc. Microsoft Corp. NextEra Energy, Inc. Amazon.com, Inc. Athene Holding Ltd. Class A

Weight 9.5% 8.6% 3.3% 3.3% 2.6% 1.8% 1.6%

P/E25.058.1 30.6 37.7 27.3

162.6 7.4

Company Name Microsoft Corp.

Apple, Inc. Amazon.com, Inc. Facebook, Inc. Class AAlphabet, Inc., Class AAlphabet, Inc., Class C Johnson & Johnson

Weight 5.6% 5.3% 4.5% 2.0% 1.6% 1.5% 1.3%

P/E37.7 30.6

162.8 33.6 36.4 36.2 18.6

CVS 1.6% 9.0 Berkshire Hathaway, Inc. B 1.3% 19.4 Facebook, Inc. Class A 1.5% 33.6 Visa, Inc. 1.2% 39.4 SquareTOTAL

1.5% 37.2%

485.3 14.3

Procter and Gamble Co. TOTAL

1.1% 25.4%

24.5 36.0

7

Manager Performance - Net of Fees 6/30/20

Fund Name

SMRS S&P 500 Index S&P 500 Style & Risk Adjusted Benchmark Lipper Large-Cap Core

Market Value

$6,901,099,287

1-Year

7.3% 7.5% 7.5% 5.8%

3-Years

10.6% 10.7% 10.7%

9.4%

5-Years

10.8% 10.7% 10.7%

9.2%

7-Years

12.2% 12.1% 12.1% 10.8%

Inception

--------

Inception Date

N/A

Excess Return Alpha Pct. Rank vs. Lipper Large-Cap Core

-0.2% -0.2%

42

-0.1% -0.1%

34

0.0% 0.1%

21

0.1% 0.1%

15

------

SMRS All-Cap Garp S&P 1500 Super Composite Style & Risk Adjusted Benchmark Lipper Multi-Cap Core

1,455,415,290 -0.9% 6.1%

-4.5% 2.1%

5.7% 9.9%

10.6% 6.8%

6.6% 10.2%

9.9% 7.2%

9.7% 11.7% 12.0% 9.4%

11.2% 11.6% 11.7%

9.3%

4/30/11

Excess Return Alpha Pct. Rank vs. Lipper Multi-Cap Core

-6.9% 3.6%

70

-4.2% -4.9%

68

-3.6% -3.3%

68

-2.1% -2.3%

51

-0.4% -0.6%

22

SMRS Large-Cap Core S&P 500 Style & Risk Adjusted Benchmark Lipper Large-Cap Core

1,038,989,214 -23.3% 7.5%

-16.3% 5.8%

0.9% 10.7% -2.0% 9.4%

2.6% 10.7%

2.9% 9.2%

6.8% 12.1%

6.2% 10.8%

5.8% 8.3% 5.8% 7.5%

8/31/07

Excess Return Alpha Pct Rank vs Lipper Large-Cap Core

-30.8% -7.0%

100

-9.8% 2.9%

100

-8.1% -0.3%

99

-5.3% 0.6%

97

-2.5% 0.0%

94

Mellon US Equity Enhanced S&P 500 Style & Risk Adjusted Benchmark Lipper Large-Cap Core

979,654,809 26.6% 7.5%

14.4% 5.8%

26.9% 10.7% 18.4% 9.4%

--------

--------

27.5% 10.7% 18.7%

9.4%

3/1/17


19.1% 12.2%

1

16.1% 8.4%

1

------

------

16.9% 8.9%

1

SMRS Large-Cap Growth S&P 500 Growth Style & Risk Adjusted Benchmark Lipper Large-Cap Growth

706,679,784 19.8% 17.8% 15.7% 20.8%

19.1% 16.7% 16.6% 18.1%

13.7% 14.6% 14.7% 14.4%

15.8% 15.7% 15.9% 15.6%

10.8% 10.9% 10.9% 10.8%

5/31/05

Excess Return Alpha Pct Rank vs Lipper Large-Cap Growth

2.1% 4.1%

59

2.3% 2.5%

37

-0.9% -1.0%

67

0.2% -0.1%

48

0.0% -0.1%

43

LA Capital All-Cap Growth S&P 1500 Growth Style & Risk Adjusted Benchmark Lipper Multi-Cap Growth

662,698,074 6.2% 16.1% 15.4% 17.6%

12.1% 15.7% 14.6% 16.1%

12.2% 13.9% 12.5% 12.3%

14.3% 15.1% 13.7% 13.8%

11.8% 10.8%

8.8% 10.2%

5/31/05

Excess Return Alpha Pct. Rank vs. Lipper Multi-Cap Growth

-9.8% -9.1%

86

-3.6% -2.5%

78

-1.7% -0.2%

49

-0.8% 0.6%

43

1.0% 2.9%

21

SMRS Mid-Cap Index S&P 400 Style & Risk Adjusted Benchmark Lipper Mid-Cap Core

598,661,035 -4.9% -6.7% -8.0% -7.3%

3.2% 2.4% 2.4% 2.0%

6.1% 5.2% 5.2% 3.8%

8.8% 8.0% 8.0% 6.7%

--------

N/A

Excess Return Alpha Pct. Rank vs. Lipper Mid-Cap Core

1.8% 3.1%

37

0.8% 0.8%

40

0.9% 0.9%

22

0.8% 0.8%

22

------

Large-Cap Consistent Growth S&P 500 Style & Risk Adjusted Benchmark Lipper Large-Cap Core

544,223,331 7.1% 7.5%

18.1% 5.8%

18.7% 10.7% 16.0%

9.4%

13.8% 10.7% 13.9% 9.2%

--------

13.2% 9.8%

12.7% 8.4%

3/1/15


-0.4% -11.0%

45

8.0% 2.7%

1

3.0% -0.1%

1

------

3.4% 0.4%

1

8

Fund Name

LA Capital Deep Value S&P 1500 Value Style & Risk Adjusted Benchmark Lipper Multi-Cap Value

Market Value

525,308,101

1-Year

-12.6% -5.5%

-12.6% -10.3%

3-Years

-0.1% 3.2%

-1.2% 0.4%

5-Years

2.9% 5.7% 6.2% 3.1%

7-Years

--------

Inception

2.7% 5.4% 5.9% 2.9%

Inception Date

4/1/15

Excess Return Alpha Pct. Rank vs. Lipper Multi-Cap Value

-7.0% 0.0%

72

-3.3% 1.0%

61

-2.7% -3.3%

56

------

-2.7% -3.1%

56

Ark Investments S&P 1500 Growth Style & Risk Adjusted Benchmark Lipper Multi-Cap Growth

516,282,559 27.4% 16.1%

0.5% 17.6%

29.0% 15.7% 24.4% 16.1%

--------

--------

32.0% 17.3% 27.2% 17.5%

3/1/16

Excess Return Alpha Pct. Rank vs. Lipper Multi-Cap Growth

11.4% 27.0%

16

13.3% 4.7%

7

------

------

14.7% 4.9%

3

Seizert Capital Partners S&P 1500 Value Style & Risk Adjusted Benchmark Lipper Multi-Cap Value

414,549,568 -2.4% -5.5% -5.3%

-10.3%

3.8% 3.2% 3.1% 0.4%

6.1% 5.7% 5.6% 3.1%

7.7% 7.7% 7.6% 5.8%

11.4% 10.4% 10.4%

8.5%

11/30/09


3.1% 2.9%

6

0.6% 0.7%

10

0.4% 0.5%

8

-0.1% 0.1%

13

1.0% 1.0%

2

Clarkston Capital Small/Mid-Cap S&P 400 Style & Risk Adjusted Benchmark Lipper Mid-Cap Core

202,705,282 1.2% -8.0% -7.8% -7.3%

5.6% 1.9%

-0.4% 2.0%

7.5% 5.0% 4.1% 3.8%

--------

9.2% 5.8% 4.7% 4.5%

1/1/14


9.3% 9.0%

3

3.8% 6.0%

14

2.5% 3.4%

8

------

3.4% 4.5%

1

Clarkston Capital Large-Cap S&P 500 Value Style & Risk Adjusted Benchmark Lipper Large-Cap Value

181,503,636 -8.1% -4.5% -7.5% -6.1%

3.6% 3.7% 2.9% 3.3%

6.2% 6.0% 4.8% 5.4%

--------

6.1% 5.7% 4.5% 5.2%

4/1/15

Excess Return Alpha Pct. Rank vs. Lipper Large-Cap Value

-3.6% -0.6%

71

-0.1% 0.7%

44

0.2% 1.5%

29

------

0.4% 1.6%

30

Attucks Asset Management S&P 1500 Style & Risk Adjusted Benchmark Lipper Multi-Cap Core

106,769,724 -5.6% 6.1%

-5.4% 2.1%

3.9% 9.9% 3.1% 6.8%

5.2% 10.2%

5.5% 7.2%

7.6% 11.7% 12.0%

9.4%

5.6% 7.9% 7.9% 6.2%

11/30/07

Excess Return Alpha Pct. Rank vs. Lipper Multi-Cap Core

-11.7% -0.2%

91

-6.0% 0.8%

81

-5.0% -0.3%

80

-4.2% -4.4%

83

-2.2% -2.3%

69

Bivium Capital Partners S&P 1500 Value Style & Risk Adjusted Benchmark Lipper Multi-Cap Value

101,331,146 -8.2% -5.5% -4.1%

-10.3%

2.0% 3.2% 3.7% 0.4%

3.3% 5.7% 5.6% 3.1%

6.7% 7.7% 7.7% 5.8%

5.0% 5.0% 8.0% 4.1%

11/30/07


-2.6% -4.1%

28

-1.1% -1.7%

27

-2.4% -2.3%

48

-1.0% -1.0%

31

0.0% -3.1%

26

Ancora S&P 1000 Style & Risk Adjusted Benchmark Lipper Mid-Cap Core

67,604,519 -10.4% -8.0% -7.9% -7.3%

--------

--------

--------

-1.8% 0.6% 0.6% 0.9%

10/1/17


-2.4% -2.5%

72

------

------

------

-2.4% -2.4%

75

9


PRIVATE EQUITY REVIEW State of Michigan Investment Board Meeting

September 10, 2020

Peter A. Woodford Senior Investment Manager

Private Equity Division

EXECUTIVE SUMMARY Performance

MPSERS Plan (6/30/20) 1-Year 3-Years 5-Years 7-Years 10-YearsAnnualized Returns -0.2% 10.7% 10.1% 12.2% 13.0% PE Benchmark Returns -4.2% 8.3% 9.9% 12.9% 13.8% Peer Median Returns -2.2% 5.2% 6.2% 8.2% 9.3% Percentile Rank vs. Peers* 39 10 7 7 9

*State Street Universe greater than $1 billion

• Private Equity returns have been strong relative to peer median returns, ranking in the top 9%of peers over the past ten years. Outperformance to peers is attributable to fund selectivityand strategy.

• It is not unusual for private equity returns to lag public benchmarks during periods ofexpansion and lead public benchmarks during periods of contraction. The past ten years,largely an expansionary period, has been no exception; however, that spread hascompressed following the COVID-19 driven downturn. Over this period, the Private EquityDivision outperformed the S&P (ten-year S&P 500 return 10.5%; lagged one quarter to alignwith benchmark and valuations) by 2.5% but underperformed the PE benchmark by 80 bps.

• For the twelve months ending June 30, 2020, the Private Equity Division made contributionsof approximately $606 million, net of distributions. Although the pace of distributions continuesto slow, stock distributions, predominantly from VC managers, have provided a notable liftyear-to-date. After an active Q1 from a capital call perspective, contributions have significantlyslowed as GPs have remained disciplined, conservatively deploying capital in an uncertainenvironment.

• Commitments closed during the quarter include:

o $25 million to Renaissance Venture Capital Fund IV, a venture capital fund-of-funds.o $42.5 million to Meritech Capital Partners VII, a late-stage, technology-focused venture

capital fund.o $75 million to Silver Lake Partners VI, a large-cap buyout fund with a technology

emphasis.o €100 million ($112 million) to CVC Capital Partners Fund VIII, a large-cap buyout fund

with a European focus.

Strategy Update The strategy for the next twelve months will focus primarily on existing sponsors raising successor funds. This may be a combination of buyout, venture capital, secondary, and growth equity funds returning to market. The Private Equity Division continues to tilt slightly toward the middle- and lower-middle market to diversify its exposure to large funds. The Venture Capital Division will continue to pursue attractive opportunities across all strategies with a focus on early stage and a bias towards healthcare versus the broader market. Co-investments will continue to play an important role in both averaging down costs and targeting specific investments with attractive risk/return characteristics.

1

Market Value in Millions

Buyout Funds 6/30/20

$6,283 45.6% 6/30/19

$5,947 44.5% Fund of Funds 2,870 20.8% 2,368 17.7%

Special Situation Funds 1,752 12.7% 1,810 13.5% Venture Capital Funds 1,480 10.8% 1,518 11.4%

Liquidation Portfolio 828 6.0% 1,022 7.6% Mezzanine Funds 300 2.2% 295 2.2%

Cash/Other 266 1.9% 420 3.1%

SMRS Private Equity

6/30/20

Mezzanine Cash/ Funds Other

Liquidation 2.2% 1.9% Portfolio

Venture CapitalFunds 10.8%

Buyout Funds45.6%

Special Situation Funds 12.7%

6.0%

Fund of Funds 20.8%

Total $13,779 100.0% $13,380 100.0%

2

6/30/20Outstanding

Commitments

OtherRecallableReturnedCapital

FXChange

CapitalCalls

New Deals

3/31/20Outstanding

Commitments

$7,839$431$42$8

($825)

$255$7,928

($ in Millions)

6/30/20Reported

Value

CashBalanceChange

ReportedValue

Change

StockDist.

Received

Cash Dist.

Received

Capital Calls

3/31/20Reported

Value

$13,779

($300)

($1,272)

($154) ($293)

$825$14,973

($ in Millions)

SMRSPrivate Equity

6/30/20

3

SMRS Private Equity

6/30/20

These numbers are based on the most recent available General Partner Data; primarily 3/31/20 and are subject to change.

Investments by Industry


24.4%

Health Care17.0%

Industrials11.3%

Other10.9%


9.5%

Financials8.8%

Energy4.1%

Materials3.9%

Consumer Staples4.0%

Telecommunication Services

4.1%

Utilities1.0%

Real Estate1.0%

4

Geographic Report: North America 74%, Europe 16%, Asia 7%, Other 3%

6/30/20Private Equity

SMRS

Asia/Africa 7.4%

United Kingdom

5.7%

Western Europe 10.3% Eastern

Europe 0.6%

Latin America

0.4%

U.S. Northwest

13.9%

U.S. Southwest

14.0%

U.S. North Central 11.8%

U.S. Southeast

8.7%

U.S. Mid-Atlantic 4.3%

U.S. New England 21.3%

Canada 1.1%

U.S. Offshore

0.1%0.4% Represents Companies with Untrackable Regions, i.e.; Fund of Funds

Investments by Region

5

($ in Millions)

Asset Vintage1986-2005 269$ 104$ 373$ 2006* 317 116 4332007 159 121 2802008 355 79 4342009 13 1 142010 159 4 1632011 586 99 6852012 982 75 1,0572013 273 108 3812014 1,347 279 1,6262015 4,933 807 5,7402016 1,918 505 2,4232017 858 841 1,6992018 963 1,888 2,8512019 307 2,061 2,3682020 73 751 824Income Accruals 1 0 1Cash 256 0 256Act. Small Cap - Stock Dist 10 0 10 Total 13,779$ 7,839$ 21,618$

*Liquidation portfolio is 2006 vintage

($ in Millions)

Reported Value

Euro ($1.12/ €) € 382

Outstanding Commitment

Total Exposure

Total (USD)

6/30/20

SMRSPrivate Equity

Reported Value


Total Exposure

$904€ 805€ 423

Portfolio by Vintage Year

FX Exposure

6

($ in Millions)

HarbourVest Partners, LLCBlackstone Group, TheLeonard Green & Partners, L.P.Kohlberg, Kravis, Roberts & Co.Warburg, Pincus LLCCarlyle Group, L.P.Advent International Corp.Grosvenor Capital Management, L.P.Flagship VenturesInSight Venture PartnersTop 10 Total Value

BuyoutFund of FundsMezzanineSpecial SituationsVenture Capital

*These numbers are based on most recent available General Partner reported data; primarily 3/31/2020 and are subject to change.

489

Asset Type3,276$ 892$ 4,168$

371 860


Reported Value Total

424 530 530 391 440

410 271 240 355

732

834 801 770 746

653 372 399

7,388$

292 116 537

555 496

10,615$

(Net IRR) Current Qtr. 1-Year 3-Year 5-Year 10-Year

183 97

3,227$

-1.6%

-5.2%-8.3%-1.6%-4.9%

9.2%5.5%7.2%5.6%

13.2%

14.4%9.3%

0.1%0.0%-0.1%0.0%-0.1%

10.0%11.1%17.2%

10.3%6.7%7.6%6.8%9.4%

SMRSPrivate Equity

6/30/20

Top 10 Sponsors

Cash Weighted Rates of Return*

7

5AM Opportunities I, L.P. $ 11,157,302 $ 19,050,000 5AM Ventures VI, L.P. 5,113,701 14,300,000 Accel Europe I, L.P. 2,812,617 1 Accel Europe II 26,297,346 3,300,000 Accel Growth Fund II, L.P. 9,901,695 0Accel Growth Fund III, L.P. 8,294,222 840,000 Accel Growth Fund IV L.P. 24,562,655 990,000 Accel Growth Fund V L.P 10,636,245 16,919,178 Accel IX, L.P. 3,195,038 3,000,000 Accel Leaders Fund II L.P. 4,887,117 4,312,500 Accel Leaders Fund L.P. 10,669,565 0Accel London V L.P. 19,186,756 1,560,000 Accel London VI, L.P. 2,616,362 9,625,000 Accel VI-S 1,977,149 652,611 Accel VI, L.P. 779,851 0Accel X, L.P. 10,229,243 0Accel XI, L.P. 3,248,040 1,440,000 Accel XII, L.P. 10,332,403 1,190,000 Accel XIII, L.P. 7,231,258 3,300,000 Accel XIV L.P. 2,894,749 6,850,000 Acorn Bioventures, L.P. 30,000,000 70,000,000 Advent Global Private Equity V 5,324,522 8,700,000 Advent International GPE IX, L.P. 55,485,428 188,750,000 Advent International GPE VI-A LP 23,702,001 0Advent International GPE VII-B, L.P. 113,688,012 12,000,000 Advent International GPE VIII-B, L.P. 221,592,528 14,174,998 Advent International LAPEF VII 0 60,000,000 Advent Latin American Private Equity Fund VI, L.P. 20,270,221 7,980,000 Affinity Asia Pacific Fund III, L.P. 4,024,699 8,913,061 Affinity Asia Pacific Fund IV, L.P. 55,889,525 19,555,459 Affinity Asia Pacific Fund V L.P. 28,099,309 140,396,722 AIP VII, L.P. 2,649,332 71,026,423 Apax Digital, L.P. 20,925,064 28,318,858 Apax Europe Fund VI 14,259,762 2,375,236 Apax Europe VII, L.P. 509,986 1,672,798 Apax IX, L.P. 167,287,226 15,247,386 Apax US VII 2,036,067 417,509 Apax VIII - B, L.P. 58,041,896 7,832,881

SMRSPrivate Equity

6/30/20

Reported ValueUnfunded

Commitment

Net Market Values by Ownership EntityAdjusted

8


CommitmentAdjusted

Apax X USD L.P. 0 150,000,000 Apollo Investment Fund IX, L.P. 22,106,832 75,028,110 Apollo Investment Fund VIII L.P. 67,391,629 13,727,389 Arboretum Ventures II 958,755 0Arboretum Ventures III, L.P. 14,909,866 0Arboretum Ventures IV, L.P. 20,646,056 9,720,000 Arboretum Ventures V, L.P. 2,262,596 31,955,000 Ares Corporate Opportunities Fund II 172,835 11,423,773 Ares Corporate Opportunities Fund III, LP 6,986,944 7,048,927 Ares Corporate Opportunities Fund IV, L.P. 62,459,824 14,586,157 ASF VIII B 29,825,448 122,894,781 AXA ASF Miller Co-Investment 380,977 6,656,684 Axiom Asia Co-Investment Fund I, L.P. 20,374,143 28,943,451 Axiom Asia IV, L.P. 52,990,251 9,950,886 Axiom Asia Private Capital Fund III, L.P. 51,639,392 5,729,639 Axiom Asia V, L.P. 16,283,381 33,750,000 BC European Capital IX 56,624,587 7,838,688 BC European Capital VII, L.P. 633,681 0BC European Capital VIII, L.P. 3,288,578 8,756,578 Berkshire Fund IX Coinvestment Fund, L.P. 15,443,103 27,421,161 Berkshire Fund IX, L.P. 95,388,651 75,459,166 Berkshire Fund VI, L.P. 16,677,112 7,600,677 Berkshire Fund VII, L.P. 6,928,483 2,444,220 Berkshire Fund VIII, L.P. 80,965,730 7,115,318 Blackstone Capital Partners IV 4,303,246 4,580,765 Blackstone Capital Partners V 6,956,497 13,069,148 Blackstone Capital Partners V-S 729,511 712,476 Blackstone Capital Partners VI, LP 147,229,353 32,907,897 Blackstone Capital Partners VII, L.P. 252,755,675 46,603,501 Blackstone Capital Partners VIII L.P. 0 200,000,000 Bridgepoint Europe IV 11,309,140 4,828,750 Carlyle Europe Partners II 569,310 4,153,347 Carlyle Europe Partners III 7,740,911 5,136,766 Carlyle Europe Partners IV, L.P. 101,110,009 12,096,183 Carlyle Europe Partners V, S.C.SP. 17,654,125 117,774,061 Carlyle Partners V L.P. 31,067,395 52,623,545 Carlyle Partners VI, L.P. 148,504,000 11,497,087 Carlyle Partners VII, L.P. 84,499,191 152,011,959 Centerbridge Capital Partners III, LP 60,025,808 30,757,036 Cerberus SMRS Partners, L.P. 31,538,027 23,304,657 Charlesbank Equity Fund IX, L.P. 31,862,100 57,302,735 Charlesbank Fund IX Overage Allocation Program 28,021,587 22,458,489 CircleUp Credit Fund I, LP 23,298,109 2,242,795 CLEARLAKE CAPITAL PARTNERS VI, L.P. 7,313,167 67,684,186 Clearlake Opportunities Partners II, LP 17,932,536 55,939,901 CM Liquidity Fund, L.P. 0 25,000,000

9


CommitmentAdjusted

Coller International Partners V, L.P. 12,013,219 2,000,000 Coller International Partners VI, L.P. 31,485,564 29,723,267 Coller International Partners VII, L.P. 132,844,994 34,955,215 Crescent Mezzanine Partners VI, L.P. 21,635,815 5,681,254 Crescent Mezzanine Partners VII 74,877,666 64,987,141 CVC Capital Partners VII, L.P. 83,151,234 84,520,588

** CVC Capital Partners VIII, L.P. 0 112,314,999 Dover Street IX, L.P. 70,560,945 23,000,000 Dover Street X, L.P. 14,731,389 135,000,000 EnCap Energy Capital Fund X, L.P. 26,067,252 6,681,669 FIMI Opportunity 6, L.P. 29,659,636 25,000,003 FirstMark Capital I, L.P. 36,787,918 196,596 FirstMark Capital IV, L.P. 26,242,728 11,200,000 FirstMark Capital OF I, L.P. 24,446,318 0FirstMark Capital OF II, L.P. 40,395,963 0FirstMark Capital OF III 2,100,000 32,900,000 FirstMark Capital P2, L.P. 116,363,391 0FirstMark Capital V, L.P. 0 35,000,000 Flagship Pioneering Origination Fund VII 3,750,000 71,250,000 Flagship Pioneering SOF II, L.P. 23,550,177 75,500,000 Flagship Pioneering VI 85,900,279 30,750,000 Flagship Ventures Fund 2004 27,008 0Flagship Ventures Fund 2007, L.P. 7,054,908 0Flagship Ventures Fund IV, L.P. 103,306,257 0Flagship Ventures Fund V 106,696,578 0Flagship Ventures Opportunities Fund I, L.P. 41,478,525 5,750,000 Fox Paine Capital Fund II, LP 21,877,141 15,382,699 FS Equity Partners VII, L.P. 91,158,872 13,216,106 FS Equity Partners VIII, L.P. 19,054,667 53,296,480 G-IV Acquisition Holdings, LLC 9,121,776 0GCM Grosvenor Fund Investment Program I, L.P. 7,071,010 1,256,800 GCM Grosvenor Fund Investment Program II, L.P. 22,453,773 13,267,284 GCM Grosvenor Fund Investment Program III - 2004 27,081,629 4,419,938 GCM Grosvenor Fund Investment Program III - 2006 35,232,362 6,750,459 GCM Grosvenor Fund Investment Program V, L.P. 52,445,738 9,245,914 GCM Grosvenor Fund Investment Program VI, L.P. 26,063,694 3,566,639 GCM Grosvenor Fund Investment Program VIII, L.P. 74,947,669 22,400,297 GCM Grosvenor SeasPriFIP LP (PIS06-10) 39,178,713 16,704,440 GCM Grosvenor SeasPriFIP LP (PIS14) 229,221,841 21,744,279 GCM Grosvenor SeasPriFIP LP (Seed) 23,058,055 16,556,088 Genstar Capital Partners IX, L.P. 16,556,216 58,033,374 Genstar Capital Partners VIII, L.P. 62,053,609 5,464,572 Genstar IX Opportunities Fund I, LP 14,941,212 34,969,695 Genstar VIII Opportunities Fund I, L.P. 57,999,405 2,750,030 Golden Bell Azalea, LLC 9,500,000 0Green Equity Investors V 100,226,555 25,966,435

10


CommitmentAdjusted

Green Equity Investors VI, L.P. 125,554,466 10,666,423 Green Equity Investors VII, L.P. 190,298,644 31,594,971 Green Equity Investors VIII, L.P. 0 250,000,000 Greenspring Master G, L.P. 69,869,016 80,000,000 Greenspring Micro II, L.P. 10,371,448 14,716,263 GSO Capital Opportunities Fund II, L.P. 8,152,157 8,095,124 GSO Capital Opportunities Fund III, L.P. 47,601,643 37,245,690 GSO COF III Co-Investment Fund, L.P. 21,055,507 27,703,099 HarbourVest Credit Opportunities Fund II, LP 0 75,000,000 HarbourVest Dover Street VIII, L.P. 21,542,272 6,075,000 HarbourVest Int'l III Partnership 151,264 1,200,000 Harbourvest Partners Co-Investment Fund IV L.P 80,985,437 19,107,835 HarbourVest Partners Co-Investment Fund V L.P. 63,700,162 130,000,000 HarbourVest Partners Mezzanine Income Fund 73,892,153 16,310,000 HarbourVest V Partnership 128,442 300,000 HarbourVest VI - Direct Fund LP 2,097,695 750,000 HarbourVest VI Partnership 453,128 2,000,000 Harvest Partners VII, L.P. 67,760,658 3,986,834 Harvest Partners VIII 39,340,004 60,159,228 HPS Mezzanine Partners III, L.P. 45,052,502 7,732,633 Insight Partners XI, L.P. 15,000,000 85,000,000 Insight Venture Partners Growth-Buyout Coinvestment 87,404,571 5,378,020 Insight Venture Partners IX, L.P. 187,856,858 492,418 Insight Venture Partners X, L.P. 109,105,472 6,200,000 Jade Equity Investors, L.P. 7,997,734 92,002,266 Kelso Investment Associates IX, L.P. 66,880,345 12,172,444 Kelso Investment Associates VII 160,467 0Kelso Investment Associates VIII 22,694,885 22,036,170 Kelso Investment Associates X, L.P. 16,491,310 81,084,345 Khosla Ventures III, L.P. 12,386,865 750,000 Khosla Ventures IV, L.P. 68,547,465 950,000 Khosla Ventures Seed D, L.P. 5,343,555 4,550,000 Khosla Ventures V, L.P. 65,123,803 1,750,000 Khosla Ventures VI, L.P. 35,823,483 38,400,000 KKR 2006 Fund, L.P. 77,115,023 4,728,614 KKR Americas Fund XII, L.P. 107,392,514 97,689,860 KKR Asian 1,924,673 0KKR Asian Fund II, L.P. 43,159,428 262,660 KKR Asian Fund III 59,749,408 46,453,873 KKR China Growth Fund 22,563,577 3,383,656 KKR European Fund II 1,073,023 0KKR European Fund III 5,969,770 6,430,608 KKR European Fund IV L.P. 92,482,429 7,590,357 KKR European Fund V (USD) SCSp 22,826,374 96,677,082 KKR Millennium Fund 232,956 0KKR North America Fund XI, L.P. 95,771,245 7,568,977

11


CommitmentAdjusted

Lead Edge Capital IV, L.P. 21,952,774 6,608,536 Lightspeed Opportunity Fund, L.P. 8,209,918 16,750,000 Lightspeed Venture Partners Select IV, L.P. 2,500,000 22,500,000 Lightspeed Venture Partners VII, L.P. 10,826,021 0Lightspeed Venture Partners XIII, L.P. 600,000 9,400,000 Menlo Special Opportunities Fund II, L.P. 8,025,848 22,205,284 Menlo Ventures IX, L.P. 935,026 0Menlo Ventures X, L.P. 1,980,641 0Menlo Ventures XI, L.P. 15,242,207 0Menlo Ventures XIV, L.P. 5,902,392 1,400,000 Meritech Capital Partners IV, L.P. 9,183,480 600,000 Meritech Capital Partners V, L.P. 28,624,352 1,450,000 Meritech Capital Partners VI, L.P. 29,010,205 12,375,000

** Meritech Capital Partners VII, L.P. 0 42,500,000 Michigan Growth Capital Partners II, L.P. 137,432,513 3,524,497 Michigan Growth Capital Partners III, L.P. 84,619,074 28,328,763 Michigan Growth Capital Partners, LP 58,816,032 9,072,836 New Leaf Biopharma Opportunities II, L.P. 102,922,215 12,000,000 New Leaf Growth Fund I, L.P. 49,558,882 0New Leaf Ventures II, L.P. 6,746,150 0New Leaf Ventures III, L.P. 43,635,738 0New Leaf Ventures IV, L.P. 24,000,635 23,562,500 Nordic Capital VI, L.P. 154,671 1 Nordic Capital VII 406,601 3,141,057 Nordic Capital VIII, L.P. (Alpha) 33,606,825 5,393,553 Oak Investment Partners X, L.P. 410,012 0Oak Investments Partners IX, L.P. 140,192 0Oaktree Opportunities Fund X, L.P. 25,914,283 5,100,000 Oaktree Opportunities Fund Xb, L.P. 22,632,977 42,000,000 OCM Opportunities Fund IX, L.P. 43,041,199 0OCM Opportunities Fund VII (B), L.P. 111,030 2,500,000 OCM Opportunities Fund VII, L.P. 358,836 0OCM Opportunities Fund VIII B, L.P. 9,352,207 0OCM Opportunities Fund VIII, L.P. 823,395 0OCM Principal Opportunities Fund IV 534,713 4,998,467 Ocqueoc Holdings, LLC 9,219,380 48,741,756 Odyssey Investment Partners Fund VI, LP 4,021,446 95,978,554 Parthenon Investors II 432,796 3,186,779 Parthenon Investors III 27,734,234 2,682,182 Parthenon Investors IV, L.P. 43,500,535 2,757,740 Peninsula Capital Fund IV 14,051 2,201,026 Peninsula Fund VI, L.P. 33,691,254 6,124,373 Permira Growth Opportunities I, L.P.1 14,213,288 33,750,000 Permira VII L.P. 1 14,071,333 69,073,724 PPC Fund II 40,112,647 38,290,758 Public Pension Capital, LLC 63,811,625 50,890,818

12


CommitmentAdjusted

** Renaissance Venture Capital Fund IV, L.P. 0 25,000,000 Rhone Partners V, L.P. 83,777,476 35,699,978 Riverside Capital Appreciation Fund VI, LP 37,634,761 7,189,562 Riverside Capital Appreciation Fund VII, L.P. 32,577,164 58,655,964 Riverside Micro Cap Fund I, LP 14,951,494 5,632,976 Riverside Micro-Cap Fund II, L.P. 48,403,039 2,735,834 Riverside Micro-Cap Fund III, L.P. 75,221,538 4,823,424 Riverside Micro-Cap Fund IV 54,348,291 3,890,438 Riverside Micro-Cap Fund IV B, L.P. 4,625,351 9,317,702 Riverside Micro-Cap Fund V, L.P. 21,404,903 75,023,352 Science Ventures Fund II, L.P. 22,073,090 3,800,000 Science Ventures Fund III, LP 4,955,357 20,000,000 Shamrock Capital Content Fund I, L.P 33,907,998 16,468,263 Shamrock Growth Capital Fund IV, L.P. 26,834,205 20,493,113 Silver Lake Partners II 22,797 3,531,586 Silver Lake Partners III 15,749,514 11,092,521 Silver Lake Partners IV, L.P. 59,491,258 2,084,020 Silver Lake Partners V, L.P. 48,069,913 22,382,511

** Silver Lake Partners VI, L.P. 0 75,000,000 Silver Lake SL SPV-2 27,990,166 0SK Capital Partners V, L.P. 12,639,604 35,897,698 SKCP Catalyst Fund I-A, L.P. 4,471,494 30,066,366 SM/TCP L.P. 14,905,375 1,615,217 SMRS - TOPE LLC 2,368,778,589 240,808,071 SMRS-CAPP LLC 42,740,436 61,300,000 SMRS-NCRP LLC 536,092,630 180,958,521 Summit Partners Growth Equity Fund X, L.P. 8,826,315 92,220,000 Sycamore Partners III, L.P. 7,032,702 85,363,601 TCW/Crescent Mezzanine Partners V, LLC 6,251,041 12,395,466 TCW/Crescent Mezzanine Partners VC Secondary 1,960,765 0The Huron Fund III, L.P. 7,972,101 2,072,756 The Huron Fund IV, L.P. 31,648,050 2,502,309 The Huron Fund V, L.P. 12,832,352 22,083,436 The Shansby Group 5 (TSG5) 467,996 4,261,291 Thoma Bravo Discover Fund II, L.P. 45,291,824 29,338,156 Thoma Bravo Fund XII, L.P. 194,469,949 2,633,922 Thoma Bravo Fund XIII, L.P. 95,131,350 34,640,223 TI Platform BOV, L.P. 5,199,725 9,824,395 TI Platform Fund II, L.P. 3,768,545 11,120,048 TI Platform SMRS SMA, L.P. 19,342,596 41,818,556 TPG Healthcare Partners, L.P. 2,287,447 22,148,159 TPG IV (Texas Pacific Group IV) 616,377 211,725 TPG Partners III, LP 461,539 2,087,002 TPG Partners VI, L.P. 50,319,605 9,990,887 TPG Partners VIII, L.P. 8,472,771 113,787,668 TPG Partners, VII, L.P. 138,648,311 16,017,346

13


CommitmentAdjusted

TPG V (Texas Pacific Group V) 5,609,531 5,841,509 Trilantic Capital Partners V (North America) Fund A, L.P 27,121,986 3,594,193 Trilantic Capital Partners VI (North America) L.P. 13,385,992 57,276,813 TSG6, L.P. 80,080,933 22,431,360 TSG7 A L.P. 112,001,382 30,502,901 TSG8, L.P. 11,781,662 127,893,954 Turnbridge Capital Partners I , LP 49,208,978 37,927,757 Veritas Capital Fund V, L.P. 141,082,385 11,358,273 Veritas Capital Fund VI, L.P. 145,820,465 13,494,710 Veritas Capital Fund VII, LP 781,283 99,218,717 Veritas V Co-Investors, L.P. 81,049,386 0Vista Equity Endeavor Fund I, L.P. 44,407,151 8,198,027 Vista Equity Endeavor Fund II, LP 4,909,328 59,153,945 Vista Equity Partners Fund V, L.P. 49,517,036 11,649,766 Vista Equity Partners Fund VI, L.P. 90,762,509 11,101,567 Vista Equity Partners VII, L.P. 17,495,877 56,183,207 Vista Foundation Fund III, L.P. 23,310,923 8,108,187 Vista Foundation Fund IV, L.P. 0 75,000,000 Warburg Pincus China-Southeast Asia II, L.P. 2,300,412 72,375,000 Warburg Pincus China, L.P. 48,026,113 4,477,500 Warburg Pincus Energy MCIP, L.P. 0 10,396,887 Warburg Pincus Energy, L.P. 58,616,303 10,300,000 Warburg Pincus Equity Partners, L.P. 1,181,942 0Warburg Pincus Financial Sector, L.P. 26,761,744 19,215,000 Warburg Pincus Global Growth, L.P. 32,037,040 115,650,000 Warburg Pincus International Partners 593,643 0Warburg Pincus Private Equity IX 7,671,634 0Warburg Pincus Private Equity VIII, L.P 277,879 0Warburg Pincus Private Equity X, L.P. 40,200,679 0Warburg Pincus Private Equity XI, L.P. 101,858,157 0Warburg Pincus Private Equity XII Secondary, L.P. 26,244,298 987,500 Warburg Pincus Private Equity XII, L.P. 183,916,631 6,912,500 WestAm COREplus Private Equity QP 392,608 2,086,719

Total Private Equity $ 13,513,130,302 $ 7,839,431,480

Cash 219,870,956 0Active Small Cap Cash 35,979,009 0Active Small Cap 9,658,083 0Income Accruals 378,976 0

Grand Total $ 13,779,017,326 $ 7,839,431,480

Total Private Equity amounts do not include Cash and Active Small Cap

New Commitments made during quarter reported

14


INTERNATIONAL EQUITY REVIEW State of Michigan Investment Board Meeting

September 10, 2020

Patrick M. Moraniec, CFA Senior Investment Manager International Equity Division

EXECUTIVE SUMMARY

Performance


Annualized Returns -3.4% 1.8% 3.1% 4.9% 6.1%

MSCI ACWI ex USA Returns -4.8% 1.1% 2.3% 3.8% 5.0%

Peer Median Returns -3.5% 1.7% 2.9% 4.3% 6.1%

Percentile Rank vs. Peers* 46 50 48 38 57 *Source: State Street Universe greater than $1 billion

The International Equity Division (IED) outperformed both peers and the division’s benchmark over all listed periods.

The portfolio outperformed the benchmark by 1.4% over the last twelve months.

Outperformance was driven by the quality factor, momentum factor, energy sector, health care sector, and financials sector.

Asset Class Goals

Construct a non-U.S. equity-focused portfolio to generate, on a consistent basis, ten-year returns that exceed the MSCI ACWI ex USA by 1.0%.

Perform in the top half of the public plan peer universe percentile rankings.

Advance people, processes, and systems to continuously improve investment decisions.

Strategy

The International Equity Division has three distinct portfolio strategies.

o Active investments, 38.8% of assets, to gain specific international stock market exposures.

o Stock plus investments, 37.9% of assets, to implement a portable alpha strategy onto high-level strategic tilts.

o Index investments, 23.3% of assets, to gain broad international stock market exposure with minimal tracking risk.

Current portfolio drivers of risk and return.

o Tracking error of the portfolio is approximately 2.1% which is below the division’s risk budget of 3.0%.

o The momentum factor, the largest strategic contributor to tracking error, accounts for only 11.0% of the total tracking error indicating that long-term the portfolio is not materially exposed to any one single risk.

o Future portfolio returns will be driven by the long-term strategic positions of the quality factor, value factor and momentum factor.

1

Quarterly changes to International Equity Division allocation.

o Rebalanced $1.4 billion of equity swaps to match the division’s long-term equity factor strategy.

o Allocated $189 million to collateral investments within the Internal Stock Plus strategy. Total included $186 million to Blackstone Strategic Opportunity Fund (BSOF) and $2.5 million to Blackstone Strategic Capital Holdings II (BSCH II). Over the full investment horizon, both investments should have returns greater than equity swap financing costs while exhibiting low sensitivity to publicly traded equities.


Market Performance

International stock markets declined nearly -33.0% in 2020. Since late March, markets have dramatically rebounded down -7.0% year-to-date. Earnings per share growth year-over-year further declined to -20.0% versus a February reading of -7.0%. Multiples have expanded approximately 23.0% year-over-year.

Quality factor and momentum factor outperformed the MSCI ACWI ex USA on a relative basis, up year-to-date 4.7% and 9.9% respectively. The value factor continued to underperform, down -18.6%. Quality, value, and momentum remain strategically important to the IED.

Emerging markets have outperformed the MSCI ACWI ex USA down only -1.7% year-to-date. Developed markets trail the broader index down -9.1%.

The U.S. dollar is down year-to-date -3.2% and has fallen nearly -9.0% since its March high. Part of the outperformance in the emerging markets can be attributed to the weakening U.S. dollar.

Commodities remain depressed, down -15.2% for the year. Oil is down -34.0% in 2020, copper is up 2.5%, and gold is up 30.4%.

Global government interest rates (index weighted) remain subdued at approximately 0.9%, down from 1.3% in early 2020.

Outlook

IED’s assessment of the global economy indicates a higher probability that the world remains in a protracted recession. COVID-19 was the catalyst, however, many signs of stress were present in late 2019 and will linger beyond the reopening of the global economy.

World trade volumes, a proxy for economic growth, were already contracting year-over-year at -1.0% in November 2019. For context, the historical average is 3.2% over the last twenty years. Through May of 2020, the latest data point, volumes collapsed down -17.7% a level not seen since 2009 in the depths of the Great Financial Crisis (GFC).

2

• In less than six weeks, the U.S. Federal Reserve moved rates to the zero bound and unconventionally expanded their balance sheet by a larger dollar amount than all of the GFC. In April, IED believed this would clear the way for President Trump to resume pressure on China even if the Federal Reserve would prefer otherwise. Through July 2020, U.S. China relations have further deteriorated economically and politically and will act as a headwind to the global recovery.

• Global PMIs were barely above expansionary territory in December 2019 at 50.1. By April 2020, global PMIs collapsed to 39.8. As of July 2020, the PMIs have fully recovered to 50.3 signaling small expansion in the global economy.

• Europe top line sales and earnings contracted year-over-year at -6.1% and -21.1%, a level not seen since the periphery debt crisis. This marks a downward acceleration in fundamentals for Europe. Forward looking sales and earnings per share are expected to be slightly up over the next 12 months, 0.5% and 1.5% respectively. Europe manufacturing PMIs indicate the economic contraction was worse in Europe relative to global PMIs with a reading of 33.4 in April.

• Japan manufacturing PMIs contracted for the seventeenth consecutive month with a reading below 50.0. Sales growth year-over-year declined -2.7% and earnings per share growth further accelerated to the downside at -24.0%, indicating sluggish economic activity. Forward looking sales growth is expected to slow -1.6% in the next year and earnings to expand slightly at 1.0%.

• Central banks are fully committed to an “anything it takes” policy similar to what Mario Draghi adopted near the end of his ECB term. The question will be if the vast amounts of liquidity can offset a major solvency crisis in the next two years.

• Analysts’ forward-looking earnings per share growth is estimated at 4.2% for the MSCI ACWI ex USA index through July 2021. The sentiment has rapidly changed. As of May 2020, analysts were projecting negative -4.6% year-over-year earnings per share growth which was the first negative forward-looking estimate since the GFC. The current health and economic crisis make it difficult to accurately project earnings over the next two years.

• Questions remain whether the late March 2020 low in stock prices was at the bottom of the market. As noted earlier, IED believes there is a higher probability we are in the early stages of a protracted recession. This belief is based on historical leading economic metrics and market fundamentals.

• In difficult forecasting times, IED prefers price to peak earnings to address the challenges analysts have in projecting forward earnings per share. Both peak earnings per share and price are known at any given moment. Although trailing earnings per share could be used, trailing earnings are usually falling during the end of a business cycle.

• IED examined international stock market bottoms back to 2000 (two recessions) and for the U.S. stock market back to 1960 (seven recessions). Limited international earnings per share data was why U.S. markets were included in the analysis.

3

The late March 2020 price low for international stocks was 9.6x price to peak earnings, slightly higher than the 9.0x average. For U.S. markets, the March low was 14.7x which was the highest multiple ever paid for peak earnings. The average for U.S. markets is approximately 9.9x. International stock markets in March may have reached a reasonable price level considering the impact to future earnings.

Go-forward returns for the MSCI ACWI ex USA index on an annualized basis are estimated at 8.3%. This rate is based on the current price and actual fundamentals over multiple periods to remove fundamental variability, better estimating the earnings power of the index.

A ten-year blended international government yield of 0.9% implies an international equity risk premium of 7.4%. The equity risk premium decreased due to an increase in stock prices and no change to the long-term government bond interest rates.

Conclusion

International stock market fundamentals further declined in the second quarter of 2020, however, global government bond yields remained near all-time lows as central banks stayed committed to ultra-accommodative monetary policies not seen since the GFC. The policies in Japan, Europe, and now the U.S. are open-ended inflation targeting processes. Central banks’ policies will remain low indefinitely as the global recession lasts longer than the COVID-19 pandemic. The liquidity crisis caused by COVID-19, will slowly turn into a solvency crisis forcing monetary policy to remain accommodative if not requiring additional large non-standard policies.

Questions remain how long can markets delay examining the fundamentals. Currently some market participants have chosen to focus on 2023 earnings to justify market multiples. IED believes that places unsustainable pressure on central banks to maintain confidence through 2023. As such, markets will more likely return to fundamentals prior to 2023. In the second quarter, the forward-looking estimates for both sales and earnings stabilized, however, growth remained subdued. Stock prices continued to rise, widening the gap between market prices and fundamentals. For this reason, IED believes in the next twelve months, major central banks will be forced to significantly increase their accommodation to maintain confidence. As of July 2020, multiples have expanded for the second year in a row more than 20.0%.

International stock markets trade at approximately their twenty-three-year average of 17.0x price to earnings history and a wide spread relative to global risk-free rates. To capture the spread to bonds, international stock investors will need a long investment horizon as the short-term environment will experience increased volatility and a higher probability of a significant drawdown in equity markets.

4

SMRS International Equity Strategies

6/30/20

Markets Amount Total % of Total

Active ($ in Millions)

BlackRock MSCI Wellington IED Quality Equity Martin Currie Marathon-London Lazard UBS Effissimo

Total Active

$1,94982851640028323317565

$4,449 38.8%

Stock Plus

Internal PIMCO

Total Stock Plus

$2,5731,765

$4,338 37.9%

Indexed

SSGA BlackRock

Total Indexed

$1,3901,281

$2,671 23.3%

TOTAL $11,458 100.0%

5

SMRS International Equity By Sector

6/30/20

Energy2.6%

Cash/REUtil. Other 1.6% 2.4% 0.6% Health Care

14.2%


13.7%


13.6%

FInancials 12.0%

Consumer Staples11.5%


8.5%

Materials 7.2%

Industrials 12.1%


6/30/20


Health Care Consumer Discretionary Information Technology Industrials Financials Consumer Staples Communication Services Materials Energy Utilities Real Estate Total Investments Cash/Other

$1,625 1,575 1,561 1,391 1,373 1,321

971 821 298 277 178

$11,391 67

14.2% 13.7% 13.6% 12.1% 12.0% 11.5%

8.5% 7.2% 2.6% 2.4% 1.6%

99.4% 0.6%

8.6% 6.4% 2.9% 7.5%

27.4% 4.9% 8.1%

11.3% 10.5%

7.8% 4.6%

100.0% 0.0%

5.6% 7.3%

10.7% 4.6%

-15.4% 6.6% 0.4%

-4.1% -7.9% -5.4% -3.0%

0.6%

Total $11,458 100.0% 100.0%

6

Benchmark: MSCI ACWI ex USA

SMRS International Equities

6/30/20

Date: 6/30/20 3/31/20 12/31/19 9/30/19

Assets ($ in Millions): $11,458 $9,835 $13,129 $11,929 Number of Securities: 2,677 2,715 2,982 2,711 Active Share: 33% 32% 33% 32%

Benchmark: MSCI ACWI ex USA

Description: The International Equities Composite represents all International Equity Division investments.

Portfolio Characteristics: SMRS MSCI ACWI ex USA LTM Normalized LTM Normalized

Return: Annualized Total Return 7.6% 9.3% 6.3% 8.3%

Sustainable Growth Rate 4.6% 6.4% 3.7% 5.8% Dividend Yield 2.1% 2.2% 2.4% 2.5% Buyback Yield 0.2% 0.1% 0.2% 0.1%

Collateral Yield 0.7% 0.7% -- --Risk: Beta 0.99 -- 1.00 --Volatility 22.3% -- 22.9% --

Tracking Error 2.1% -- 0.0% --Information Ratio 0.6 0.5 -- --

Fundamental: Average Capitalization ($ in Billions) 100.1 -- 91.9 --Price/Earnings 19.9 18.2 20.8 18.3

Price/Book 1.7 1.9 1.7 1.9 ROE 8.6% 10.7% 8.2% 10.6%

TOP TEN HOLDINGS ($ in Billions* - $ in Millions**)

Portfolio Market FY1 Market Weight Capitalization* P/E Value**

Tencent Holdings Ltd. 3.2% $614.6 38.3 $361.5

Taiwan Semiconductor Manufacturing Co., Ltd. 2.4% 275.1 19.1 277.4

Roche Holding 1.8% 298.3 16.2 201.6

Alibaba Group Holding, Ltd. 1.7% 580.4 24.7 192.3

Nestle S.A. 1.6% 329.0 24.3 180.5

Samsung Electronics Co., Ltd. 1.5% 293.9 14.4 166.7

ASML Holding 1.3% 156.3 45.9 151.2

Sanofi 1.1% 127.9 14.9 125.2

CSL Limited 1.0% 89.7 42.6 116.4 Novo Nordisk 1.0% 117.3 24.0 115.2

TOTAL 16.5% $2,882.4 $1,888.0

7

International Equity Performance - Net of Fees 6/30/20

Fund Name Market Value 1-Year 3-Years 5-Years 7-Years Inception

Inception Date

Total International Equity $11,458,333,596 MSCI ACWI ex USA Lipper International Multi-Cap Core

-3.6% -4.8% -5.5%

1.6% 1.1% 0.0%

2.9% 2.3% 1.7%

4.7% 3.8% 3.6%

5.1% 5.2% 4.6%

1/1/04

Excess Return 1.2% 0.5% 0.6% 1.0% -0.1% Pct Rank vs. Lipper International Multi-Cap Core 25 11 14 7 23

Total International Active Strategy $4,449,651,610 -0.1% 2.0% 3.0% 4.7% 4.5% 5/1/05 MSCI ACWI ex USA Lipper International Multi-Cap Core

-4.8% -5.5%

1.1% 0.0%

2.3% 1.7%

3.7% 3.6%

4.6% 3.9%

Excess Return 4.7% 0.9% 0.7% 1.0% -0.1% Pct Rank vs. Lipper International Multi-Cap Core 5 7 12 10 21

BlackRock MSCI Systematic Return 1,948,107,364 MSCI ACWI ex USA Lipper International Multi-Cap Core

0.6% -4.8% -5.5%

------

------

------

6.3% 2.0% 1.0%

12/1/18

Excess Return Pct Rank vs. Lipper International Multi-Cap Core

5.4% 3

----

----

----

4.3% 1

IED Quality Equity 515,588,067 MSCI ACWI ex USA Lipper International Multi-Cap Core

------

------

------

------

1.3% -8.5% -9.2%

2/1/20


----

----

----

----

9.8% 1

Wellington IRE 403,833,805 MSCI World ex USA Lipper International Multi-Cap Core

-4.3% -5.4% -5.5%

2.3% 0.8% 0.0%

2.7% 2.0% 1.7%

5.0% 3.8% 3.6%

4.0% 3.5% 3.2%

12/1/05


1.2% 33

1.5% 5

0.7% 17

1.2% 6

0.4% 13

Martin Currie International Long-Term 400,128,980 MSCI ACWI ex USA Lipper International Multi-Cap Core

8.0% -4.8% -5.5%

7.9% 1.1%

-5.5%

------

------

11.3% 3.9% 3.0%

2/1/17


12.8% 1

6.8% 1

----

----

7.4% 1

Marathon-London International Fund 283,237,699 MSCI World ex USA Lipper International Multi-Cap Core

-6.3% -5.4% -5.5%

-0.5% 0.8% 0.0%

2.1% 2.0% 1.7%

4.6% 3.8% 3.6%

6.2% 4.7% 4.6%

2/1/12


-0.9% 66

-1.3% 65

0.1% 40

0.8% 10

1.5% 7

Wellington Emerging Markets Local Equity 278,396,608 MSCI Emerging Market Index Lipper Emerging Markets

-5.0% -3.4% -4.1%

1.4% 1.9% 1.2%

3.8% 2.9% 2.3%

4.0% 3.2% 2.4%

5.4% 3.3% 2.9%

12/1/11

Excess Return Pct Rank vs. Lipper Emerging Markets

-1.6% 56

-0.5% 47

0.9% 31

0.8% 29

2.1% 16

Lazard/Wilmington International Equity 232,875,000 MSCI World ex USA Lipper International Large-Cap Core

-7.4% -5.4% -5.5%

0.6% 0.8% 0.0%

0.7% 2.0% 1.7%

------

0.6% 1.0% 1.0%

6/1/14

Excess Return Pct Rank vs. Lipper International Large-Cap Core

-2.0% 75

-0.3% 51

-1.3% 81

----

-0.4% 72

UBS China A Opportunity Fund $175,093,800 MSCI China On shore Lipper Emerging Markets

------

------

------

------

11.1% 8.2%

10.0%

5/1/20

Excess Return Pct Rank vs. Lipper Emerging Markets

----

----

----

----

2.9% 31

Wellington Select China Equity 145,720,673 MSCI All China Index Lipper Emerging Markets

------

------

------

------

21.4% 1.9% 0.9%

9/1/19

Excess Return Pct Rand vs. Lipper Emerging Markets

----

----

----

----

19.5% 2

Effissimo Capital Management Japan 64,555,904 MSCI Japan Lipper International Small/Mid-Cap value

-17.4% 3.1%

-9.9%

-9.2% 3.0%

-3.4%

------

------

-2.5% 4.7% 2.2%

12/1/15

Excess Return Pct Rank vs. Lipper International Small/Mid-Cap Value

-20.5% 91

-12.2% 89

----

----

-7.2% 89

8

Fund Name Market Value 1-Year 3-Years 5-Years 7-Years InceptionInception

Date

Total International Stock Plus Strategy $4,338,403,535 -6.6% 0.9% 2.7% 4.8% 6.1% 1/1/09 MSCI ACWI ex USA -4.8% 1.1% 2.3% 3.7% 6.4% Lipper International Multi-Cap Core -5.5% 0.0% 1.7% 3.6% 6.0% Excess Return -1.8% -0.2% 0.4% 1.1% -0.4% Pct Rank vs. Lipper International Multi-Cap Core 68 27 18 7 47

Internal Stock Plus 2,573,340,918 -10.1% -0.1% 1.2% 4.0% 3.8% 9/1/11 MSCI ACWI ex USA -4.8% 1.1% 2.3% 3.7% 3.8% Lipper International Multi-Cap Core -5.5% 0.0% 1.7% 3.6% 4.2% Excess Return -5.3% -1.3% -1.1% 0.3% 0.0% Pct Rank vs. Lipper International Multi-Cap Core 89 59 71 32 69

PIMCO StocksPLUS 1,765,062,617 -1.2% -- -- -- 1.1% 4/1/19 MSCI ACWI ex USA -4.8% -- -- -- -1.6% Lipper International Multi-Cap Core -5.5% -- -- -- -2.3% Excess Return 3.6% -- -- -- 2.7% Pct Rank vs. Lipper International Multi-Cap Core 6 -- -- -- 11

Total International Index Strategy $2,670,278,451 MSCI ACWI ex USA Lipper International Multi-Cap Core Excess Return Pct Rank vs. Lipper International Multi-Cap Core

-4.3% -4.8% -5.5% 0.5%

33

2.2% 1.1% 0.0% 1.1%

5

3.4% 2.3% 1.7% 1.1%

10

4.8% 3.7% 3.6% 1.1%

6

6.6% 5.5% 5.5% 1.2%

5

7/1/09

SSGA MSCI ACWI ex USA Index 1,389,839,385 MSCI ACWI ex USA Lipper International Multi-Cap Core Excess Return Pct Rank vs. Lipper International Multi-Cap Core

-4.0% -4.8% -5.5% 0.8%

31

----------

----------

----------

-1.3% -1.7% -2.5% 0.3%

23

11/1/17

Blackrock ACWI ex USA Index 1,280,439,067 MSCI ACWI ex USA Lipper International Multi-Cap Core Excess Return Pct Rank vs. Lipper International Multi-Cap Core

-4.6% -4.8% -5.5% 0.2%

40

----------

----------

----------

-3.1% -3.4% -3.7% 0.3%

42

3/1/18

9


REAL & OPPORTUNISTIC RETURN REVIEW

State of Michigan Investment Board Meeting September 10, 2020

Jennifer Yeung Senior Investment Manager

Real & Opportunistic Division

EXECUTIVE SUMMARY

Performance

MPSERS Plan (6/30/20) 1-Year 3-Years 5-Years 7-Years 10-Years Real & Opportunistic -0.1% 8.8% 8.5% 10.7% 9.6% Custom Benchmark 5.9% 6.8% 7.0% 7.0% 7.2%

• The portfolio value is $8.9 billion with a one-year return of -0.1%. Performance was impacted by the global deterioration in asset values across all facets of the economy. Current asset values are reflective of the issues faced in the first half of 2020 and the uncertainty of economic activity through the remainder of the year and into 2021. Given diversification across numerous strategies and a keen focus on manager selection, our portfolio has generally been resilient and our outlook for long-term valuations remains positive.

• Portfolio return was positively impacted by income earned from entertainment royalties, investments in asset managers, credit investments and natural resource strategies.

Strategy Update

• The objective of the Real Return & Opportunistic portfolio is to provide an inflation hedge and/or to gain exposure to attractive opportunities that may not fit in another plan portfolio.

• During the quarter, the Real Return & Opportunistic portfolio continued to benefit from exposure to assets with low equity beta and diversity of strategy, industry and geography. Several of our private credit managers called capital to exploit investment opportunities created by extreme market volatility.

• The Real Return & Opportunistic portfolio has approximately $3.6 billion of unfunded commitments.

• No new commitments closed during the quarter.

• In addition to monitoring the impact of COVID-19, we remain focused on finding differentiated strategies that are additive to the current portfolio mix and continue to like private credit opportunities, niche strategies with some scalability, and contractual cash flow. Specifically, we like opportunities that have defensible cash flows and offer structural downside protection. We continue to be selective and favor experienced investment teams with a proven track record.

1

SMRS

Real Return and Opportunistic 6/30/20

Top Ten Advisors or Entities

($ in Millions)

Advisor or Entity Market Value

Great Mountain Partners LLC $ 2,588 Apollo Global Management 1,025 Barings Alternative Investments 797 Domain Capital Advisors 571 Sixth Street Partners 409 Czech Asset Management 405 Kayne Anderson Capital Partners 302 Fortress Investment Group 221 Ridgewood Energy 208 HPS Investment Partners 207

Total Market Value $ 6,733

2

SMRS

Real Return and Opportunistic 6/30/20

Investments By Strategy

Short Term Investments

2.8% Opportunistic

Real Assets 63.2%

Credit 21.6%

12.4%


Real Assets $5,616

Credit 1,919

Opportunistic 1,099 Short Term Investments 250

Total Investments $8,884

3

SMRS Real Return and Opportunistic

6/30/20

($359 )

$8,980 $566

($553)

$250 $8,884

$ Millions Invested Commitments

3/31/20 Capital Calls Cash Dist. Reported Value Short Term 6/30/20 Reported Value Received Change Investments Reported Value

($566 )

$3,995 $183 $3,612

$ Millions Outstanding Commitments $0

3/31/20 New Deals Capital Calls Recallable 6/30/20 Outstanding Returned Capital Outstanding

Commitments and Other Commitments

4

SMRS Real Return and Opportunistic

6/30/20 Net Market Value by Entity

Net Market Value Unfunded

Commitment * *

Abernathy Abernathy II Altus Midstream Angelo Gordon Credit Solutions Fund Apollo European Principal Finance Fund II Apollo HK TMS Investments Holdings LP Axton Holdings Barings Asset Based Income Fund I Barings Global Real Asset Fund I Blackstone Strategic Capital Holdings, LP Blue Peninsula Fund LP Broadriver III BSCH Parallel (MLG) I LP BSCH II BSCH II Co-Invest Carlyle Energy Mezzanine Opportunity Fund II Carlyle IEP Co-Invest (Varo) Carlyle International Energy Partners Carlyle International Energy Partners II Castle Credit SMRS Holdings LLC Centerbridge SCP III Centerbridge SCP III, LP – Flex, L.P. Content Holdings, LLC Credit Opportunity Fund III Energy Recap and Restructuring ERR MI Holdings LP FCO MA MI LP Financial Credit Investment II Financial Credit Investment III Flywheel Energy Co-Invest Fortress Transportation & Infrastructure Greatrock LLC Global Maritime GSO Credit Alpha Fund HarbourVest Direct Lending Fund (L) L.P. Hopen Life Science Fund II HPS Red Cedar Fund Kayne Anderson Energy Fund VII, LP Kayne Anderson Private Energy Income Fund Kayne Anderson Private Energy Income Fund II Kayne Solutions Fund KKR Energy Income & Growth Fund KKR Lending Partners KKR Lending Partners II Lakewater

$ 265,780,511 4,388,437 2,217,950

73,690,257 11,573,014

1 2,235,744,595

157,270,129 61,161,643 55,590,547

136,576,911 55,449,341

137,031,580 1 0

16,231,263 12,771,749 35,669,213

8,997,093 135,303,764

28,194,876 20,868,837

453,928,320 19,614,439 11,542,907

1,752,450 152,667,176 244,177,896 224,302,941

43,060,611 49,062,230 58,685,941 66,632,650 31,800,613

0 3,721,948

198,395,631 20,383,599 98,857,262 35,444,330 77,342,325 23,165,779

5,223,837 19,318,427 93,311,958

$ 17,170,707 131,068,376

0 24,711,423

8,106,174 0 0

126,378,012 42,646,984 53,909,388 54,608,949

143,127,419 0

237,500,000 100,000,000

18,075,502 837,818

24,008,247 135,000,000

48,203,298 3,025,715

49,000,000 39,034,618 19,972,427

7,085,025 2,269,933

39,860,296 183,297,353 144,720,362

7,000,000 0 0

3,414,854 37,910,063

100,000,000 640,000

106,600,000 15,469,791 26,294,961

124,373,958 171,986,652

1,953,202 11,930,723 11,737,239

1,900,000

5

Net Market Value Unfunded

Commitment

* *

*

* **

Lakewater II Lakewater III Lakewater IV Lakewater V Marathon CLO Equity Fund Merit Energy Partners I LP MidCap Finco Holdings LTD Mortgage Servicing Rights Napier Park Aircraft Leasing Vehicle I, LLC Napier Park AL Rollover Fund I Nash Co-Investment New Fortress Energy HLDGS New Fortress Energy LLC NGP Natural Resources XII Orion Co-Investments III, LP Orion Mine Finance Orion Mine Finance 1A Orion Mine Finance Co-Fund II LP Orion Mine Finance II Orion Mine Finance III LP Redding Ridge Holdings, LP Ren Venture Fund II Ren Venture Fund III Ridgewood Energy Oil & Gas II Ridgewood Energy Oil & Gas III Ridgewood Fund II Co-Invest (REOG) Riverside Credit Solutions FD I LP RPEP Energy Opportunistic Institutional Partners SJC Direct Lending Fund II SJC Direct Lending Fund III SJC Direct Lending Fund III Co-Invest G-III SJC Onshore Direct Lending Fund IV – SMRS, L.P. Social Network Holdings Specialty Loan Fund III Sprott Private Resource Lending (US), LP Sprott PRL(M) LP Sprott PRL(M-Co-Invest) LP Structured Credit Recovery Fund IV Terra Co-Investment TICP CLO Partners II TICP CLO Partners III TSSP Agriculture Partners TSSP Adjacent Opportunties Partners TSSP Capital Solutions TSSP Opportunities Partners IV Turning Rock Fund I, LP Vida Insurance Credit Opportunity Fund II Warwick (SMRS) Co-Invest, L.P. Warwick Partners III Total Real Return and Opportunistic Short-Term Investments & Other

Grand Total Fund of Funds New Commitment

68,043,742 241,346,727

31,252,113 85,992,756 10,222,652 34,392,069

284,994,840 68,762,206 39,403,046 13,629,885 11,923,923

352,687,375 8,010,654

61,251,974 3,346,162

46,086,116 34,332,810 13,591,024 80,125,424 10,289,548 72,884,775 28,753,742

9,832,511 68,118,172 92,959,432 18,060,415 40,301,612 28,455,907

227,172 199,728,111

20,000,000 185,000,000 112,984,464

8,657,730 20,450,668

1,469,468 7,636,755

167,407,575 27,229,965 26,788,097 13,162,230

4,887,630 212,238,694 117,607,600

33,952,538 48,256,968 98,086,545 30,090,325 51,750,259

$ 8,633,569,385 250,047,437

$ 8,883,616,823

$

$

1,800,000 2,900,000

832,177 3,001,598 4,951,579

0 0 0

17,944,862 60,067,481

94,259 0 0

72,260,015 0

1,057,949 827,618

35,000,000 27,646,392 53,174,426 10,842,105

1,500,000 16,000,000 17,104,339

134,363,529 4,516,974 7,556,985

10,144,235 38,261,315 25,279,108

0 65,000,000

5,590,289 5,931,772

78,961,168 22,295,779 17,687,500

0 14,000,000

1,724,474 86,448,017 94,657,148

102,560,804 183,949,525

65,372,463 30,034,706

9,433,075 2,089,081 4,511,027

3,612,203,242 0

3,612,203,242

6


REAL ESTATE AND INFRASTRUCTURE REVIEW State of Michigan Investment Board Meeting

September 10, 2020

Todd A. Warstler Senior Investment Manager

Real Estate and Infrastructure Division

EXECUTIVE SUMMARY

Performance


Annualized Returns -2.3% 5.5% 7.3% 9.4% 10.1%

NCREIF NPI 1.4% 4.1% 5.4% 6.9% 8.3%

Peer Median Returns 2.7% 5.8% 7.3% 9.3% 10.5%

Percentile Rank vs. Peers* 93 71 54 48 65 *State Street Universe greater than $1 billion

Underperformance relative to the one-year benchmark resulted from the Real Estate and Infrastructure Division’s (REID) strategy of being overweight in hospitality and performance in the infrastructure portfolio particularly in the energy sector.

Strategy Update

• The Covid 19 global pandemic and Shelter-in-Place orders implemented to slow the spread of the virus resulted in major negative impacts to the US economy and commercial real estate and infrastructure markets. Large segments of the US economy remain shuttered to various degrees with economic reopening at various stages across the country. The impacts are only beginning to be felt in the commercial markets with uneven impacts across the real estate and infrastructure sectors. We will monitor, assess, and shift strategies as necessary. US and foreign investors remain cautious and transaction volumes have dropped to very low levels.

• We are focused on sourcing off-market opportunities through our extensive network and reducing risk in the portfolio through early income-generating investments including credit strategies that are higher in the capital stack with a shorter projected hold period. We have selectively acquired properties where we can add value through management and leasing and have continued to develop properties at attractive risk-adjusted returns. The team continues to assemble portfolios in both traditional and non-traditional real estate sectors that we believe will become institutional property types, providing above market appreciation and total returns.

• We have been actively managing the portfolio, with capital returned of more than $1 billion, and funding for new or existing investments of just under $700 million over the past 12 months. We will continue to work with our advisors in executing the disposition of properties and realizing gains at low capitalization rates where these opportunities still exist.

• The REID has approximately $1.4 billion in unfunded commitments. No new commitments were made during the quarter.

1

SMRS Real Estate and Infrastructure

6/30/20

Cash/Land Other SFR 1.6% 1.3% 1.7% Retail

Apartment42.2%

Office 12.1%

Infrastructure 11.0%

Hotel 9.7%

5.4%

Industrial 15.0%


6/30/20 6/30/19 Apartment $2,659 42.2% $2,813 40.2% Industrial 942 15.0% 588 8.4% Office 764 12.1% 970 13.9% Infrastructure 691 11.0% 861 12.3% Hotel 613 9.7% 919 13.1% Retail 338 5.4% 325 4.6% Single Family Residential (SFR) 108 1.7% 331 4.8% Land 100 1.6% 102 1.5%

$6,215 98.7% $6,909 98.8% Cash/Other 80 1.3% 85 1.2%

Total Investments $6,295 100.0% $6,994 100.0%

2

SMRS Real Estate by Region Based on Market Value (excludes cash & cash equivalents)

06/30/20

3

Pacific

18.4%

Mountain

10.9%

International comprises 8.2%

Southwest

13.6%

Southeast

11.2%

East N. Central

7.0%

West N. Central

2.8%

Northeast

13.7%

Mideast

14.2%

Geographic regions defined by NCREIF, whose property index composition is: Pacific 34.0%, Mountain 6.5%, West N. Central 1.2%, Southwest 10.7%, East N. Central 6.7%, Southeast 9.8%, Northeast 19.5%, Mideast 11.6%

SMRS Real Estate and Infrastructure

6/30/20

Top Ten Advisors or Entity

Advisor or Entity

MWT Holdings LLC Principal Real Estate Investors Clarion Partners Five Star Realty Partners LLC Domain Capital Advisors Inc Blackstone Group Rialto Capital Management LLC CIM Investment Advisors LLC Transwestern Investment Management L&B Realty Advisors

($ in millions)

Market Value

$ 2,014 547 424 345 281 219 214 186 182 179

$ 4,591

Occupancy by Property Type

Apartment Office Industrial Retail Hotel

SMRS Portfolio 94.3% 86.9% 96.2% 89.8% 51.6%

National Average 93.4% 87.7% 92.7% 95.3% 51.8%

4

SMRS Market Values by Ownership Entity

6/30/20

REAL ESTATE Unfunded

Market Value Commitment

801 Grand Avenue Capital, LLC $ 60,960,379 $ 0 AEW Senior Housing III 4,072,870 715,013 AEW Senior Housing Investors IV 6,779,379 41,371,546 Apollo Asia Real Estate Fund 45,659,115 30,234,574 Asana Partners Fund I 26,189,872 4,245,809 Asana Partners Fund II 6,309,974 38,280,405 Avanath Affordable Housing II, LLC 32,925,322 0 Avanath II SMRS Co-Investment Fund LLC 13,940,793 0 Avanath Affordable Housing III 42,762,791 5,311,980 Avanath Affordable Housing IV 6,576,896 29,261,396 Blackstone R/E Partners V, LP 1,376,385 0 Blackstone R/E Partners VI, LP 3,808,470 3,680,930 Blackstone R/E Partners VIII, LP 72,032,072 12,753,548 Blackstone R/E Partners IX, LP 53,894,920 144,685,022 Capri Urban Investors, LLC 7,043,390 0 CIM Commercial Trust Corp 6,335,557 0 CIM Fund III, LP 36,000,388 0 CIM Fund VIII, L.P. 104,296,649 1,487,563 CIM VI (Urban REIT), LLC 32,295,439 0 Clarion Gables Multifamily Trust, LP 32,986,191 0 Columbus Circle Holdings, LLC 164,966,517 163,665,768 Crown Small Cap Real Estate 16,283,757 4,402,500 DM2501, LLC 0 0 Domain GVA-1, LLC 36,208,550 1,940,056 Domain Hotel Properties, LLC 136,266,152 0 Eastport Properties, LLC 0 0 Gateway Capital Real Estate Fund II, LP 2,860,085 0 Great Lakes Property Group Trust 8,059,014 9,565,475 GreenOak Europe III, LP 11,610,372 70,378,890 Heitman Credit 49,759,451 0 IDR Core Property Index Fund LLC 25,984,033 0 India Property Fund II, LLC 14,764,954 1,552,610 Invesco Mortgage Recovery Feeder Fund 3,642,648 0 Invesco Mortgage Recovery Fund II, L.P. 22,786,301 34,249,727 Invesco Strategic Opportunities III, L.P. 22,921,479 82,461,385 IPF II Co-Invest LP 16,020,181 1,270,897 JBC Funds North LaSalle LLC 20,023,403 0 JBC Opportunity Fund III, LP 495,673 0 KBS/SM Fund III, LP 50,091,744 0 KBS/SM Fund IV 155,660 0 L-A Saturn Acquisition 28,499,782 0 Landmark Real Estate Partners V, LP 6,138,471 0 LaSalle Asia Opportunity Fund II, LP 119 0 LaSalle Asia Opportunity Fund III, LP 1,201,534 0

5

Lion Industrial Trust Lion Mexico Fund, LP Lombard GVA0016 (former AGL Annuity) Lone Star Fund X LP Lone Star Fund XI LP Lubert-Adler Real Estate Fund VII, LP M1 Westgate CoInvest LLC M301W CoInvest LLC MERS Acquisitions Ltd. MIP Holdco LLC MSREF V - International MSRESS Fund III Institutional LP MWT Holdings, LLC Northpark Land Associates Orange Investors LLC Paladin Realty Brazil Investors III (USA), LP Paladin Realty Latin America Investors IV-CI, LP Paladin Realty TB COINV V LP Penmain Office LLC Principal Separate Account Proprium RE Spec. Situations Fund, LP Rialto Absolute Partnership I Rialto Credit Partshp LP Rialto Real Estate Fund, LP Rialto Real Estate Fund II, LP Rialto Real Estate Fund III-Debt, LP Rialto Real Estate Fund III-Property, LP Rialto Mezzanine Partners Fund SM Brell II LP Stockbridge RE Fund II-C, LP Strategic II LLC TPG RE Finance Trust Inc. (TRTX) TPG Real Estate Partners II TPG Real Estate Partners III TSP Spartan C-I LLC TSP Spartan C-II LLC TSP Value & Income Fund II, LP True North High Yield Invest. Fund II, LLC True North Real Estate Fund III, LLC

Short-Term Investments and Other

Total Real Estate Investments

$

$

Market Value

250,459,787 4,960,254

345,658,513 127,897,892

5,395,129 58,158,863

6,313,704 1,652,939

179,225,843 147,124,171

2,339,339 6,273,893

2,014,670,558 37,886,410

453,068 7,744,434

27,294,831 10,842,711 42,398,985

486,649,674 85,806,203 68,962,122 20,659,266 20,406,397 28,448,717 39,973,188 35,532,347

307,268 20,661,797 6,731,671

54,614,450 41,488,481 27,760,414 6,663,263

7,154 15,735,038 19,639,852 1,877,412

29,676,186

5,523,338,960 63,190,547

5,586,529,507

$

$

UnfundedCommitment

0 0 0

29,311,293 184,384,432

6,538,662 0 0

7,130,012 13,859,458

0 0 0

7,659,661 0 0 0 0 0

65,884,391 16,143,656

0 0 0 0 0

5,342,466 0 0 0

30,946,825 0

9,531,098 41,814,220

0 0

30,197,274 0

5,000,000

1,135,258,541 0

1,135,258,541

* New or additional commitment made during the quarter reported

6

SMRS Market Values by Ownership Entity

6/30/20

INFRASTRUCTUREUnfunded

Market Value Commitment

Arclight Energy Partners VI, LP $ 31,442,118 $ 7,004,763 Arclight Energy Partners VII, LP 2,079,091 46,778,097 ASF VI Infrastructure B LP 22,479,015 9,156,177 ASF VII Infrastructure Fund B L.P. 13,663,173 17,789,037 ASF Como Co-Investment LP 6,132,596 2,405,051 Basalt Infrastructure Partners, LP 39,643,726 2,219,045 Blackstone Energy Partners, LP 16,848,754 4,728,291 Blackstone Energy Partners II, LP 52,736,421 4,332,432 Brookfield Infrastructure Fund II-B, L.P. 52,339,949 4,614,993 Customized Infrastructure Strategies, LP 31,046,569 4,608,964 Dalmore Capital Fund 63,728,219 0 GCM Grosvenor Infrastructure Investment Program, L.P. 74,511,637 0 GCM Grosvenor Customized Infrastructure Strategies II, L.P. 43,874,098 14,728,938 Global E&P Infrastructure Fund II L.P. 47,416,091 5,666,611 GSO Energy Select Opportunities Fund LP 16,869,013 23,237,456 GSO Energy Select Opportunities Fund II, LP 2,227,433 46,638,959 JPMorgan AIRRO India SideCar Fund US, LLC 68,222,675 1,419,301 JPMorgan AIRRO Fund II 7,995,740 7,013,452 KKR Eagle CoInvest L.P. 27,532,470 1,853,268 KKR Global Infrastructure Investors, LP 8,519,089 4,182,224 Ridgewood Water & Strategic Infrastructure Fund LP 7,035,022 42,612,201 RPEP SMRS Infra II, LLC 4,951,154 500,000 StonePeak Infrastructure Fund LP 49,774,426 10,031,198

$ 691,068,479 $ 261,520,458 Short-Term Investments and Other 17,015,675 0

Total Infrastructure Investments $ 708,084,154 $ 261,520,458

TOTAL INVESTMENTS $ 6,294,613,661 $ 1,396,778,999 * New or additional commitment made during the quarter reported

7


FIXED INCOME REVIEW State of Michigan Investment Board Meeting

September 10, 2020

Daniel J. Quigley Senior Investment Manager

Fixed Income Division

EXECUTIVE SUMMARY

Performance


Annualized Returns 3.7% 4.5% 4.6% 4.4% 4.4%

Bloomberg Barclays US Agg 8.7% 5.3% 4.3% 4.0% 3.8%

Peer Median Returns 7.4% 4.8% 4.6% 4.2% 4.7%

Percentile Rank vs. Peers* 86 62 52 46 63

*State Street Universe greater than $1 billion

• The fixed income portfolio underperformed its benchmark and peer group on a one-year and three-year basis. This underperformance was driven by an overweight to corporate credit and structured credit securities and an underweight to U.S. Treasury securities and Agency Residential Mortgage Backed Securities (RMBS).

• The performance of risk assets was strong during the quarter as markets started to recover from the first quarter selloff. This recovery was supported by record amounts of Monetary and Fiscal Policy support as the Federal Reserve and U.S. Treasury sought to support the economy and stabilize financial markets during the COVID-19 economic shutdown. Investment Grade corporates, high yield, and emerging market debt all experienced quarterly returns above 9%. The performance of the U.S. Aggregate Index was driven by this credit spread tightening in corporate bonds and returned 2.9% for the quarter.

• The year-over-year (YOY) widening of spreads for high yield credit and structured credit securities was the main driver of performance on a one-year basis. In addition to this, the portfolio had a shorter duration than the U.S. Aggregate benchmark. This hurt relative performance as interest rates declined substantially on a YOY basis.

Strategy Update

The objective of the Fixed Income Division portfolio is to meet or exceed the returns of the Bloomberg U.S. Aggregate Bond Index while satisfying the overall characteristics of a core fixed income portfolio. These characteristics are: income, liquidity, principal preservation, and diversification from equity market risk. The portfolio has a higher yield than the benchmark while having a risk profile that is similar to the long-term volatility experienced in traditional core fixed income. The yield-to-maturity of the portfolio is currently 3.3% versus a benchmark yield of 1.3%. In addition to this, the portfolio exhibits risk characteristics that are in line with the historical volatility of traditional fixed income benchmarks and has equity beta of 0.2.

The Core-plus strategy implemented to achieve this goal includes:

o Core: As of June 30, 2020, the portfolio’s allocation to U.S. Treasuries, Investment Grade corporate bonds, government-guaranteed U.S. Agency Debentures, RMBS, and Commercial Mortgage Backed Securities (CMBS) was 58.3%. This includes a 20.7% allocation to U.S. Treasuries, TIPS, and cash.

o Plus: The portfolio maintains a strategic out-of-benchmark allocation to high-yield corporate debt, securitized credit, and global fixed income strategies as market opportunities allow. This allocation increases the portfolio yield and total return potential but results in lower liquidity and higher volatility. The allocation to the Plus portfolio was 41.7% as of June 30, 2020.

1

Tactical Update

The allocation to securitized credit, primarily in CMBS, ABS, non-agency RMBS, and CLO securities, was 30.0% of the portfolio at the end of the quarter. The combination of low interest rate duration and high coupon income (often floating rate) offers attractive characteristics for the overall fixed income portfolio in this low interest rate environment. This portion of the portfolio underperformed significantly as securitized markets experienced a dramatic selloff and freeze in market liquidity during the quarter. The one-year return on this portfolio was -5.2%.

The allocation to high-yield strategies was 5.1% at the end of the quarter. This out-of-benchmark position underperformed during the first quarter but recovered strongly last quarter. The one-year performance of this allocation was 1.6% on a one-year basis, underperforming the core index by over 600 basis points (bp).

The portfolio has a meaningful allocation to floating rate securities, including AAA CLO investments and investment-grade floating rate corporate bonds. This allocation accounts for approximately 20% of portfolio assets. This allocation will underperform during risk-off markets when interest rates decline, however should exhibit strong risk-adjusted return characteristics on a go forward basis in this low interest rate environment.

The allocation to U.S. TIPS was reduced during the quarter and ended the period at 3.2% of the fixed income portfolio. The TIPS allocation has underperformed nominal U.S. Treasuries on a one-year basis as inflation expectations have declined, however has experienced strong absolute returns that exceed 8% on a one-year basis. We believe that this allocation offers an attractive hedge to the portfolio should inflation expectations increase in the future.


• The yield curve for U.S. Treasury securities steepened on a YTD basis for the quarter as short-term interest rates fell by a larger amount than long-term interest rates. Three-month U.S. Treasury Bills declined by 141 bp to 0.14% at the end of the quarter while ten-year U.S. Treasuries decreased by 125 bp to 0.66%.

• Inflation expectations increased during the quarter with ten-year breakeven inflation expectations ending June at 1.34%, an increase of 40 bp for the quarter.

• Credit markets recovered during the quarter with HY corporate bond spreads tightening by 254 bp to 626 bp at the end of the quarter. These HY spreads were still 290 bp higher on a YTD basis after the selloff in February and March. Investment grade corporate bond spreads also tightened during the quarter, decreasing by 122 bp to 150 bp.

• Emerging Markets debt also strengthened during the quarter with spreads decreasing by 249 bp to 408bp. EM spreads are 107 bp wider on a YTD basis.

• Commercial Mortgage Backed Securities (CMBS) were one of the few credit markets that did not experience a reduction in credit spreads during the quarter as markets priced in an increased likelihood of delinquencies and defaults for commercial real estate loans in the current economic environment. BBB CMBS spreads widened by 53 bp during the quarter to 740 bp. These spreads are 483 bp higher on a YTD basis

Conclusion

The portfolio currently has a neutral interest rate duration to the benchmark but remains overweight to corporate and structured debt securities. This positioning increases the income of the portfolio while also increasing the potential for price volatility. The portfolio will continue to look for attractive risk-adjusted opportunities within the fixed income opportunity set.

2

SMRS Fixed Income by Strategy

6/30/20

Amount Total % of Total

Core ($ in Millions)

FID Internal PIMCO Mortgage Fund PGIM Investment Grade Credit Total Core

$4,386490221

$5,097 55.6%

Tactical

Fidelity Tactical Total Tactical

$491$491 5.4%

Securitized Debt

Met West Securitized Ops Napier Park CLO Debt Napier Park ABS Income Principal CMBS TICP CLO Debt Fortress Credit ABI Putnam DMS Napier Park Strategic Loan Total Securitized Debt

$488462473381380306143112

$2,745 30.0%

High Yield

PGIM High Yield Columbia Management Crescent Direct Lending Total High Yield

$212196

60$468 5.1%

Global

T. Rowe Global Multi-Sector PGIM Global Liquid Relative Value

Total Global

$252 110

$361 3.9%

TOTAL $9,163 100.0%

NOTE: Totals may not be exact due to rounding.

3

SMRS Fixed Income Holdings

Portfolio Characteristics

Benchmark: Barclays Aggregate

6/30/20

Characteristic Portfolio Benchmark

Average Maturity (Yrs) 9.3 8.0

Duration (Yrs) 5.9 6.0

Spread Duration (Yrs) 6.9 6.3

Coupon (%) 3.4 3.0

Yield to Maturity (%) 3.3 1.3

Credit Rating A AA

VaR (%) 11.1 7.7

Tracking Error 4.47 NA

Beta (vs S&P 500) 0.17 -0.01

Commentary

Objectives Highlights

Income: The coupon of the portfolio is approximately 40 bps higher than the benchmark. Price movement has been the main driver of U.S. bond market returns YTD, but Income is the primary driver of long-term performance.

Liquidity: 20.3% of the portfolio is invested in cash, U.S. Treasuries, and TIPS. These investments can be liquidated via same-day trading.

Principal Preservation: The portfolio has a large allocation to U.S. Treasuries and carries an investment-grade credit rating.

Diversification: The equity beta of the portfolio is roughly 0.2 meaning that the portfolio returns have a low correlation with equity market movements.

4

SMRS Fixed Income By Rating

6/30/20

Not Rated 4.4% AA

8.4%

Below Investment AAA Grade 40.7% 12.9%

A 15.2%

BBB 18.4%



AAA $3,732 40.7% 68.5% -27.8% AA 769 8.4% 3.4% 5.0% A 1,388 15.2% 11.9% 3.3% BBB 1,685 18.4% 13.5% 4.9%

* Below Investment Grade 1,185 12.9% 0.5% 12.4% Not Rated 404 4.4% 2.2% 2.2%

Total Investments $9,163 100.0% 100.0%

* Comprised of approximately 8.4% High Yield Credit and 4.5% High Yield RMBS/ABS

5

Benchmark: Barclays US Aggregate

SMRS Fixed Income By Asset Type

6/30/20

Government CashUnassigned Related

Securitized 40.0%

Corporate33.9%

U.S. Treasuries 16.3%

U.S. TIPS 3.2%

2.8% 2.6% 1.2%


6/30/20


Securitized Corporate U.S. Treasuries U.S. TIPS Unassigned Government Related Cash

$3,661 3,107 1,493

297 260 237 108

40.0% 33.9% 16.3%

3.2% 2.8% 2.6% 1.2%

29.5% 27.3% 37.2%

0.0% 0.0% 6.0% 0.0%

10.5% 6.6%

-20.9% 3.2% 2.8%

-3.4% 1.2%

Total Investments $9,163 100.0% 100.0%

6


6/30/20

SMRS Duration Distribution

Fixed Income Composite Versus Benchmark

40%

30%

20%

10%

0%

Portfolio % Benchmark

33.7%

26.3%

23.0%

18.3% 17.2% 16.6%

12.9%

10.5% 10.6% 9.5%

7.3% 7.0% 7.1%

0.0%

<1 1 to 3 3 to 5 5 to 7 7 to 10 >10 NA # of Years

Source: Factset


Portfolio Benchmark Portfolio Benchmark Duration Assets Weight Weight Duration* Duration*

<1 $2,407 26.3% 7.1% 0.2 0.6 1 to 3 962 10.5% 33.7% 2.1 2.1 3 to 5 1,576 17.2% 23.0% 4.0 3.9 5 to 7 1,179 12.9% 10.6% 5.9 6.0 7 to 10 872 9.5% 7.3% 8.0 8.1 >10 1,521 16.6% 18.3% 18.2 17.2 NA 646 7.0% 0.0% 0.0 0.0

Total $9,163 100.0% 100.0% 5.9 6.0

* Effective Duration

7


Total Fixed Income Performance - Net of Fees (MPSERS)

6/30/20

Total Fixed Income

Bloomberg/Barclays Aggregate Bond Index

Market Value

$9,163,146,101

N/A

1-Year

3.51%

8.74%

3-Years

4.30%

5.32%

5-Years

4.38%

4.30%

7-Years

4.19%

3.96%

10-Years

4.23%

3.82%

Internal Core Fixed Income 4,386,234,270.00 8.02% 5.82% 5.12% 4.62% 4.37%

Externally Managed Fixed Income

PIMCO Mortgage Fund

Bloomberg/Barclays US MBS Agy Fixed Indx

Investment Grade Credit

PGIM Investment Grade

Bloomberg/Barclays Credit Index

Tactical Fixed Income

Fidelity Tactical Bond Fund


High Yield Fixed Income

Columbia Management High Yield

PGIM High Yield

Crescent Direct Lending

Bloomberg/Barclays US HY BA/B 2% Cap

Structured Fixed Income

Principal CMBS

MetWest Securitized Opportunities

Napier Park ABS Income

Napier Park Strategic Loan LP

Napier Park CLO Debt

TICP CLO Debt

Fortress ABI

Putnam DMS


Blended CMBS Benchmark

Global Fixed Income

T. Rowe Global Multi-Sector

PGIM GLRV

Custom GMS Benchmark

$4,776,911,830.74

489,781,623

N/A

$220,880,452

220,880,452

N/A

$491,392,519

491,392,519

N/A

$468,161,940

196,266,323

211,847,577

60,048,040

N/A

$2,745,220,259

381,275,317

488,389,125

472,558,392

111,533,387

462,020,250

380,233,111

305,964,006

143,246,672

N/A

N/A

$361,475,038

251,505,528

109,969,510

N/A

-0.78%

6.65%

5.67%

9.46%

9.46%

9.07%

5.76%

6.02%

8.74%

1.63%

1.50%

2.12%

3.35%

2.06%

-5.19%

-9.17%

1.82%

11.58%

2.39%

0.16%

3.43%

8.74%

5.94%

4.06%

3.42%

5.55%

4.18%

2.84%

6.30%

6.30%

6.14%

5.05%

5.49%

5.32%

4.00%

3.70%

4.47%

4.16%

1.53%

0.89%

3.82%

1.52%

5.05%

2.39%

3.16%

5.32%

4.90%

4.00%

4.08%

4.78%

3.73%

5.93%

5.93%

5.54%

4.64%

5.26%

4.30%

5.13%

4.90%

5.46%

5.01%

2.06%

3.92%

4.82

4.30%

4.58%

3.94%

5.53%

5.58%

5.14%

5.11%

3.96%

3.73%

3.96%

5.16%

4.32%

5.69%

5.79%

5.24%

9.19%

3.82%

8.18%

3.82%

5.48%

8


ABSOLUTE RETURN REVIEW State of Michigan Investment Board Meeting

September 10, 2020

Daniel J. Quigley Senior Investment Manager

Absolute Return Strategy

EXECUTIVE SUMMARY

Performance


Absolute Return 0.0% 3.1% 2.4% 3.7% 4.3% HFRI FOF Conservative -1.5% 1.3% 1.0% 2.0% 2.3%

The value of the Absolute Return portfolio is $4.2 billion with a one-year return of 0.0%. The performance of the portfolio was positive for the second quarter with several strategies bouncing back from the market selloff in the first quarter.

Credit strategies drove strong performance in the quarter across corporate credit, residential mortgages and distressed credit sub-strategies. Corporate credit performance was positive as the high yield and leveraged loan markets rebounded following the March dislocation, bolstered by central bank support and the gradual restart of economic activity across the US. The residential mortgage markets rallied from their March lows as technical selling pressure subsided and borrower delinquencies outperformed market expectations. Distressed credit strategies were also positive as post-reorg equities and distressed credits recovered modestly.

Multi-Strategy and Event strategies were the second largest contributors to performance for the quarter. Event managers generated alpha due to their exposure to sectors most impacted by COVID-19 related lockdowns, which rebounded strongly in the quarter on the prospect of economies reopening. Within Multi-Strategy, the Special Situations sub-strategy performed well with key contributors including a portfolio of mortgage servicing rights, a capital markets strategy and a second lien in a software company.

Strategy Update

The objective of the Absolute Return portfolio is to diversify the total plans’ holdings, targeting returns above investment-grade fixed income with lower volatility than the equity portfolio. The portfolio utilizes a diverse mix of managers that invest both long and short to target specific exposures and seek to hedge out unwanted risk.

No new commitments for the quarter.

In terms of allocation priorities, we are focused on continuing to recover losses from the first quarter market selloff and protecting capital going forward. We have slightly increased our exposure to multi-strategy managers.

Overall, we will continue to focus on opportunities that seek to provide diversification, protect the downside and deliver absolute return.

1

SMRS Absolute Return

6/30/20

Net Market Values by Entity

Net Market Value

* Tahquamenon Fund, LP $ 3,528,142,022

Cerberus Manitou Residential Loan Fund, LP 130,758,013

JM IV, LP 70,482,775

SJC Direct Lending Revolver Fund III, LP 86,092,690

MP Securitized Credit Master Fund, LP 46,998,302

* EnTrust White Pine Partners, LP 11,774,670

Visium Balanced Fund, LP 299,801

Monument Park, LLC 254,194,257

Total Absolute Return $ 4,128,742,530

Short-Term Investments & Other 50,073,672

Grand Total $ 4,178,816,202

* Fund of Funds

2


6/30/20

Investments By Strategy

Diversifying12.1%

Multi-Strategy/Event

34.8%

Equities8.3%

Credit 44.8%

Strategy Breakdown

Underlying Funds:

Strategies:

Relationships:

74 Median Position Size:

4 Average Position Size:

8 Largest Position Size:

0.5%

1.3%

7.3%

3


6/30/20

Liquidity Analysis

Redeemable Marginal Allocation

(% each period)

Aggregate Allocation

(% since Analysis Date)

By 10/1/20

By 1/1/21

By 7/1/21

By 1/1/22

By 1/1/23

After 1/1/23

Illiquid

31.56% 31.85% 10.75% 4.02% 5.06% 4.45% 12.51%

31.56% 63.21% 73.96% 77.98% 83.04% 87.49% 100.00%

Total 100.00% N/A

4


DEFINED CONTRIBUTION REVIEW

State of Michigan Investment Board Meeting September 10, 2020

Woodrow S. Tyler Senior Investment Manager

Defined Contribution, Trusts & Agencies Division

EXECUTIVE SUMMARY

Overview

Defined Contribution (DC) plans are participant led investments. The role of the Bureau of Investments is to offer a sufficient range of investment options to allow the participants to diversify their individual retirement accounts and construct portfolios that reasonably span the risk/return spectrum. To this end, the Plans may be comprised of at least one investment option from the categories below.

Investments Options

Tier I: Target Date Funds and Passively Managed Index Funds Target Date Funds (TDFs) are the default option for plan participants. Each TDF seeks to

achieve its objective by investing in a set of underlying index funds representing various asset classes. Over time, the allocation to asset classes and funds change according to a predetermined "glide path" and will become more conservative as it approaches the target retirement date.

Passively Managed Index Funds are comprised of low-cost index funds which seek to replicate the performance of a variety of cash, bond and stock indices with very little tracking error and at a low fee.

Tier II: Actively Managed Funds These are funds actively managed by investment managers which attempt to outperform

various cash, bond and stock indices over long periods of time.

Tier III: Self Directed Brokerage Account – Non-Core Options TD Ameritrade provides access to a broad range of investment choices including individual

stocks, bonds, CDs, over 100 commission-free ETFs, and more than 13,000 mutual funds— including more than 2,100 no-load, no-transaction-fee (NTF) mutual funds.

SOM Plans 6/30/19 6/30/20

State of Michigan 401(k) $6,295 $6,644

State of Michigan 457 1,804 1,775

Pension Plus 401(k) & 457 794 1,082

EAA 11 11

Total $8,904 $9,512 ($ in millions)

Investment Selection

The selection of each investment option for the Plans is based on the prudence standards set by the Governing Documents and applicable law, with flexibility built-in to allow a search to take full advantage of strategic opportunities. The search will focus on finding opportunities which are tailored to the Plans’ specific needs. The BOI, in consultation with the Office of Retirement Services (ORS), will establish search criteria that aligns with the purpose and objective an investment option is seeking to attain. Due diligence will be completed with the goal of selecting a plan that, in the totality of circumstances, offers fair and reasonable investment options for the Plan participants.

1

With respect to Tier III investments, the universe of available options is extensive. Since the selection of investments is directed solely by the participants which elect the Tier III option, the State does not provide any criteria for selecting or monitoring these non-core investment options.


The Federal Reserve announced on March 23 that “they would do whatever it takes for as long as it takes” to get the economy turned around immediately. This stopped the decline in financial markets and led to their subsequent recovery in April which has continued into July with equity markets recovering much of their first quarter losses. Much of Washington’s fiscal stimulus is set to end in August, but Washington is likely to extend additional support for households and firms in the second half with an estimated $1.0-$1.5 trillion in added benefits likely.

The COVID19 crises led to one of the deepest recessions in the last 90 years, but the quick action by both the Federal Reserve and Washington appear to have made it one of the shortest recessions on record. Data suggests the U.S. recession ended in March, but markets are likely to trade nervously over the coming weeks in response to the second wave of pandemic and its uncertain impact on the economy.

Significant uncertainty remains about the shape of the economic recovery and this will remain as an overhang for financial markets. Nearly all economists agree that the shape of the recovery will be a function of the outlook for the virus and most believe the benefits of improved social practices, better therapeutics and the potential for one or more vaccines will begin to improve the outlook starting in early 2021 with improvement throughout the year.

DC Plan Evolution

The SECURE Act (Setting Every Community Up for Retirement Enhancement) was signed into law with broad bi-partisan support at the end of 2019. While there are 29 provisions in the law, they can be categorized into three main provisions which will allow more Americans to participate in workplace plans and empower greater retirement readiness:

1. Extend Retirement Plan Access a. Authorize open Multiple Employer Plans (MEPs) and repeal of the “one bad apple”

rule (effective January 1, 2021) b. Encourage small employers to adopt plans and auto enroll by providing tax credits

(effective January 1, 2020) c. Establish long-term part-time worker status (effective January 1, 2021)

2. Increase Savings Contributions a. Increase the limit on automatic escalation from 10% to 15% (effective

January 1, 2020) b. Allow contributions to a traditional IRA after age 70½ (effective January 1, 2020) c. Change required minimum distributions age from 70½ to 72 (effective

January 1, 2020) 3. Expand Savings Distribution Options

a. Modified the fiduciary Safe Harbor for selecting an annuity provider (effective January 1, 2021)

b. Enable portability of lifetime income products (effective January 1, 2021) c. Offer penalty-free distributions upon birth or adoption of a child (effective

January 1, 2021) d. Amend wealth transfer strategies by limiting the window of post-death payments

(effective January 1, 2021) e. Feature lifetime income disclosure- (DOL will establish standards by end of 2020).

2

SMRS Defined Contribution Strategies

6/30/20

Markets Amount % of Fee per Total $1,000

QDIA ($ in Millions)

Total Target Date Fund

6/30/20 6/30/19

$2,274 $1,837 23.9% $0.70

Tier I Index Funds

State Street S&P 500 Index Fund $1,334 $1,212 $0.13 State Street Bond Market Index Fund $950 804 0.20 State Street Global All Cap Equity ex-U.S. Index Fund $655 609 0.45 State Street S&P Mid Cap Index Fund $553 577 0.20 BlackRock Government Short-Term Investment CL F $245 232 0.56 BlackRock S&P Small Cap 600 Equity Index CL F $118 134 0.25 BlackRock Emerging Markets Index CL F $114 123 0.69

Total Tier I Index $3,969 $3,691 41.7% $0.26

Tier II Active Funds

Stable Value Fund $1,210 $1,161 $2.23 Dodge & Cox Stock Fund $483 571 4.13 Jennison Large Cap Growth Fund $486 403 2.92 American Funds EuroPacific Growth R6 $293 319 4.90 Artisan Mid Cap Fund $148 124 7.05 Voya Small Cap Growth Equity Fund $135 152 4.33 PIMCO Total Return I Fund $126 118 4.60 T. Rowe Price Mid-Cap Value Fund $99 118 6.30 Virtus Ceredex Small-Cap Value Eq I $52 73 6.80 Prudential High Yield Fund $31 32 3.76 Oakmark Equity & Income I $0 116 4.30

Total Tier II Active $3,062 $3,187 32.2% $3.54

Tier III

Total Self Directed Brokerage Account $208 $189 2.2% NA

Total Defined Contribution Assets $9,512 $8,904 100.0% $1.41

NOTE: Totals may not be exact due to rounding.

3

SMRS Defined Contribution by Investment Strategy

6/30/20

Self Managed Account

2.2%

Passive Strategies

41.7%

Active Strategies32.2%

Target DateRetirement Fund

23.9%


Passive Strategies Active Strategies Target Date Retirement Fund Self Managed Account

6/30/20 $3,969 3,062 2,274

208

41.7% 32.2% 23.9% 2.2%

6/30/19 $3,691 3,187 1,837

189

41.5% 35.8% 20.6% 2.1%

Total Investments $9,512 100.0% $8,904 100.0%

*Loan Fund $209M as of 6/30/20 Note: Totals may not be exact due to rounding.

4

Defined Contribution Performance by Fund 6/30/20

Fund Name

State Street Target Retirement Income Fund State Street Income Custom Index Morningstar Target-Date Retirement Variance State Street Income Custom Index Variance Morningstar Target-Date Retirement

Market Value

$103,578,041

1-Year

4.2% 4.0% 4.0% 0.2% 0.2%

3-Years

4.7% 4.6% 4.4% 0.1% 0.3%

5-Years

4.3% 4.2% 4.1% 0.1% 0.2%

10-Years

5.4% 5.5% 5.1% -0.1% 0.3%

State Street Target Retirement 2020 Fund State Street 2020 Custom Index Morningstar Target-Date 2020 Variance State Street 2020 Custom Index Variance Morningstar Target-Date 2020

132,259,673 4.1% 3.9% 4.1% 0.2% 0.0%

5.5% 5.4% 5.2% 0.1% 0.3%

5.4% 5.3% 4.9% 0.1% 0.5%

8.3% 8.3% 6.8% 0.0% 1.5%


208,442,758 6.0% 5.7% 3.9% 0.3% 2.1%

6.7% 6.6% 5.5% 0.1% 1.2%

6.4% 6.4% 5.4% 0.0% 1.0%

9.2% 9.3% 7.8% -0.1% 1.4%


241,387,181 6.9% 6.7% 3.6% 0.2% 3.3%

7.2% 7.2% 5.7% 0.0% 1.5%

6.9% 6.8% 5.7% 0.1% 1.2%

9.8% 9.8% 8.1% 0.0% 1.7%


265,464,801 6.6% 6.3% 3.1% 0.3% 3.5%

7.3% 7.2% 5.9% 0.1% 1.4%

7.0% 7.0% 6.0% 0.0% 1.0%

10.0% 10.0% 8.8% 0.0% 1.2%


263,483,153 5.9% 5.7% 2.4% 0.2% 3.5%

7.2% 7.1% 5.8% 0.1% 1.4%

7.1% 7.0% 5.9% 0.1% 1.2%

10.1% 10.1% 8.8% 0.0% 1.3%


271,207,482 5.3% 5.1% 2.1% 0.2% 3.2%

7.1% 7.0% 5.8% 0.1% 1.3%

7.1% 7.0% 6.1% 0.1% 1.0%

10.1% 10.2% 9.2% -0.1% 0.9%


339,866,730 5.0% 4.9% 1.8% 0.1% 3.2%

7.0% 6.9% 5.7% 0.1% 1.3%

7.0% 7.0% 6.0% 0.0% 1.0%

10.1% 10.1% 9.0% 0.0% 1.1%


339,593,326 5.0% 4.9% 1.8% 0.1% 3.2%

7.0% 6.9% 5.8% 0.1% 1.2%

7.0% 7.0% 6.2% 0.0% 0.8%

N/A N/A N/A N/A N/A

State Street Target Retirement 2060 Fund State Street 2060 Custom Index Morningstar Target-Date 2060+ Variance State Street 2060 Custom Index Variance Morningstar Target-Date 2060+

108,323,939 5.0% 4.9% 1.4% 0.1% 3.6%

7.0% 6.9% 5.7% 0.1% 1.3%

7.0% 7.0% 6.2% 0.0% 0.8%

N/A N/A N/A N/A N/A

5

Fund Name Market Value

State Street Target Retirement 2065 Fund $240,378 State Street 2065 Custom Index Morningstar Target-Date 2060+ Variance State Street 2065 Custom Index Variance Morningstar Target-Date 2060+

1-Year

N/A N/A N/A N/A N/A

3-Years

N/A N/A N/A N/A N/A

5-Years

N/A N/A N/A N/A N/A

10-Years

N/A N/A N/A N/A N/A

TIER 1

State Street S&P 500 Index Fund 1,334,078,155 S&P 500 Index Morningstar Large Blend Variance S&P 500 Index Variance Morningstar Large Blend

7.5% 7.5% 3.6% 0.0% 3.9%

10.7% 10.7% 8.1% 0.0% 2.6%

10.7% 10.7% 8.1% 0.0% 2.6%

13.9% 14.0% 11.7% -0.1% 2.2%

State Street Bond Market Index Fund 950,352,676 Bloomberg Barclays U.S. Aggregate Index Morningstar Intermediate-Term Bond Variance Bloomberg Barclays U.S. Aggregate Index Variance Morningstar Intermediate-Term Bond

8.9% 8.7% 7.8% 0.2% 1.1%

5.4% 5.3% 4.8% 0.1% 0.6%

4.3% 4.3% 4.0% 0.0% 0.3%

3.8% 3.8% 3.8% 0.0% 0.0%

State Street S&P Mid Cap Index Fund 552,809,672 S&P 400 Index Morningstar Mid-Cap Blend Variance S&P 400 Index Variance Morningstar Mid-Cap Blend

-6.8% -6.7% -6.3% -0.1% -0.5%

2.4% 2.4% 2.1% 0.0% 0.3%

5.2% 5.2% 3.7% 0.0% 1.5%

11.3% 11.3% 9.6% 0.0% 1.7%

State Street Global All Cap Equity ex-U.S. Index Fund 654,680,386 MSCI ACWI ex USA IMI (Net) Morningstar Foreign Large Blend Variance MSCI ACWI ex USA IMI (Net) Variance Morningstar Foreign Large Blend

-4.2% -4.7% -4.8% 0.5% 0.6%

1.3% 1.0% 0.4% 0.3% 0.9%

2.6% 2.3% 1.6% 0.3% 1.0%

N/A N/A N/A N/A N/A

BlackRock Government Short-Term Investment CL F 245,391,293 BofA Merill Lynch US 3-Month Treasury Bill Index Variance BofA Merill Lynch US 3-Month Treasury Bill Index

1.4% 1.6% -0.2%

1.7% 1.8% -0.1%

1.1% 1.2% -0.1%

N/A N/A N/A

BlackRock S&P Small Cap 600 Equity Index CL F 117,515,143 S&P SmallCap 600 Index Morningstar Small Blend Variance S&P SmallCap 600 Index Variance Morningstar Small Blend

-11.4% -11.3% -11.5% -0.1% 0.1%

N/A N/A N/A N/A N/A

N/A N/A N/A N/A N/A

N/A N/A N/A N/A N/A

BlackRock Emerging Markets Index CL F 114,312,137 MSCI Emerging Market (Net) Morningstar Diversified Emerging Mkts Variance MSCI Emerging Market (Net) Variance Morningstar Diversified Emerging Mkts

0 -3.5% -3.4% -4.2% -0.1% 0.7%

1.9% 1.9% 0.8% 0.0% 1.1%

2.8% 2.9% 2.1% -0.1% 0.7%

N/A N/A N/A N/A N/A

TIER 2

Stable Value Fund 1,209,512,867 Barclays Int Gov/Credit A or Higher Index Hueler Universe Variance Barclays Int Gov/Credit A or Higher Index Variance Hueler Universe

2.7% 7.2% 2.4% -4.5% 0.3%

2.5% 4.3% 2.3% -1.8% 0.2%

2.4% 3.2% 2.1% -0.8% 0.3%

2.3% 2.9% 2.1% -0.6% 0.2%

Dodge & Cox Stock Fund 482,860,539 Russell 1000 Value Index Morningstar Large Value Variance Russell 1000 Value Index Variance Morningstar Large Value

-6.9% -8.8% -7.7% 1.9% 0.8%

2.8% 1.8% 2.1% 1.0% 0.7%

5.8% 4.6% 4.3% 1.2% 1.5%

11.6% 10.4% 9.5% 1.2% 2.1%

6

Fund Name Market Value

Jennison Large Cap Growth Fund $485,774,996 Russell 1000 Growth Index Morningstar Large Growth Variance Russell 1000 Growth Index Variance Morningstar Large Growth

1-Year

29.5% 23.3% 16.9% 6.2% 12.6%

3-Years

22.3% 19.0% 15.8% 3.3% 6.5%

5-Years

17.3% 15.9% 12.7% 1.4% 4.6%

10-Years

N/A N/A N/A N/A N/A

American Funds EuroPacific Growth R6 293,297,656 MSCI EAFE Index - Net Div Morningstar Foreign Large Blend Variance MSCI EAFE Index - Net Div Variance Morningstar Foreign Large Blend

3.2% -5.1% -4.8% 8.3% 8.0%

4.8% 0.8% 0.4% 4.0% 4.4%

4.9% 2.1% 1.6% 2.8% 3.3%

7.5% 5.7% 5.2% 1.8% 2.3%

Voya Small Cap Growth Equity Fund 134,542,652 Russell 2000 Growth Index Morningstar Small Growth Variance Russell 2000 Growth Index Variance Morningstar Small Growth

-0.5% 3.5% 4.3% -4.0% -4.8%

3.1% 7.9% 9.7% -4.8% -6.6%

4.8% 6.9% 7.9% -2.1% -3.1%

12.0% 12.9% 12.4% -0.9% -0.4%

T. Rowe Price Mid-Cap Value Fund 99,161,083 Russell Midcap Value Index Morningstar Mid-Cap Value Variance Russell Midcap Value Index Variance Morningstar Mid-Cap Value

-6.9% -11.8% -13.4% 4.9% 6.5%

0.5% -0.5% -1.7% 1.0% 2.2%

4.1% 3.3% 1.7% 0.8% 2.4%

9.8% 10.3% 8.7% -0.5% 1.1%

PIMCO Total Return I Fund 126,406,204 Bloomberg Barclays U.S. Aggregate Index Morningstar Intermediate Core-Plus Bond Variance Bloomberg Barclays U.S. Aggregate Index Variance Morningstar Intermediate Core-Plus Bond

8.3% 8.7% 6.8% -0.4% 1.5%

5.2% 5.3% 4.6% -0.1% 0.6%

4.4% 4.3% 4.0% 0.1% 0.4%

4.2% 3.8% 4.1% 0.4% 0.1%

Artisan Mid Cap Fund 148,143,004 Russell Midcap Growth Index Morningstar Mid-Cap Growth Variance Russell Midcap Growth Index Variance Morningstar Mid-Cap Growth

24.1% 11.9% 9.3% 12.2% 14.8%

19.2% 14.8% 12.2% 4.4% 7.0%

13.5% 11.6% 9.4% 1.9% 4.1%

16.5% 15.1% 12.9% 1.4% 3.6%

Virtus Ceredex Small-Cap Value Eq I 51,554,396 Russell 2000 Value Index Morningstar Small Value Variance Russell 2000 Value Index Variance Morningstar Small Value

-19.2% -17.5% -17.2% -1.7% -2.0%

-3.3% -4.3% -5.0% 1.0% 1.7%

1.2% 1.3% -0.1% -0.1% 1.3%

8.1% 7.8% 7.2% 0.3% 0.9%

Prudential High Yield Fund 30,520,194 Bloomberg Barclays U.S. Corp. HY 1% Issuer Cap Index Morningstar High Yield Bond Variance Bloomberg Barclays U.S. Corp. HY 1% Issuer Cap Index Variance Morningstar High Yield Bond

1.3% -0.5% -2.0% 1.8% 3.3%

4.3% 3.1% 1.9% 1.2% 2.4%

5.3% 4.6% 3.2% 0.7% 2.1%

N/A N/A N/A N/A N/A

Self Directed 207,709,112

TOTAL $9,512,469,625

Loan Fund: $209,441,324

7


BASKET CLAUSE REVIEW State of Michigan Investment Board Meeting

September 10, 2020

Karen M. Stout, CPA, CGFM Administrator

Trust Accounting Division

SMRS Basket Clause Investments

6/30/20

Asset Class Value

Total Absolute Return $ 4,128,742,532

Total Real Return and Opportunistic 690,778,929

Total International Equity 64,569,928

Total Fixed Income 70,622,366

Total Basket Clause Investments $ 4,954,713,755

The basket clause investments on June 30, 2020, were $5.0 billion or 6.9% of the total portfolio value of $72.2 billion.

The Public Employees Retirement System Investment Act, 1965, PA 314, MCL 38.1132 et seq , authorizes the State Treasurer to invest up to 30% of the system's assets in investments "not otherwise qualified under the act." MCL 38.1140d (1) commonly referred to as Section 20d (after the authorizing section of PA 314) or Basket Clause investments, gives the State Treasurer the flexibility to take advantage of market opportunities not specifically authorized in PA 314 while conserving protections against imprudent investment.

Disclaimer

This presentation was given solely for the purpose of explaining the structure, investment process, and returns for the State of Michigan Retirement System. It should not be interpreted in any way as financial advice.